Support and Resistance Levels - Forex News by FX Leaders

Support and Resistance Levels

Posted Monday, March 21, 2016 by
Skerdian Meta • 3 min read

A good way to understand support and resistance trading is to picture a man trying to get past a certain line but a fence is blocking his way. Though he will keep going along the fence but will not be able to pass it. The fence represents what is called “support and resistance levels”.

An upper blockage, appearing at the end of a bullish trend, is a resistance point. It represents the point at which sellers outnumber buyers and the price starts to go back down. A lower blockage, appearing at the end of a bearish trend, is a support point. At this point, the price has reached a momentary low and will start going up, at least for the time being.

support and resistance trading strategy

As can be seen in the chart above, the big advantage of support and resistance levels is that they can be easily distinguished. They do not require high levels of chart analysis and for that reason can be used by both skilled and novice traders. Keep in mind that resistance and support levels are not exact lines but zones. The exact point at which they occur cannot be determined.

The barriers caused by the resistance and support levels do not last forever and our job is to determine which levels we can trust and which have a high probability of breaking. This is not an exact science but with a proper understanding of the market and the use of some technical analysis, this method has very high odds of working. Levels that have proven themselves at least three times in a row are considered more trustworthy.

Going back to our man, if at some point he manages to cross the fence he might now find himself stuck on the other side. Correspondingly, a resistance level, once cracked, can turn into a support level and a support level into a resistance level. An example of this phenomenon can be seen in the chart below:

follow support and resistance forex strategy by looking at a chart with support and resistance levels
The support and resistance trading strategy ranks in the top five; other key strategies include the trend line, moving averages, candlesticks and price action. Forex traders tend to use indicators that are highly visual and not those complex forex indicators which are difficult to follow.

The support and resistance indicator is very easy to follow. You just draw a line where you see two or more tops and bottoms which have rejected the price before. As we said above, forex is not an exact strategy and no indicator works right down to the pip so when you use the support and resistance indicator it´s better to place the stop a reasonable amount of pips above/below the line. In the EUR/USD chart above, the price has pierced the resistance level at 1.1470 twice but has come back down and never closed above it.

Broken Support level
When a support level breaks, the decline accelerates
Returning to our man and his fence, if he runs towards the fence faster in order to break the barrier and is successful, we already know that he will get stuck on the other side. However, other factors will keep changing and he will keep moving to resist their power. This same situation can be applied to forex. When an important support/resistance level is broken, the price continues moving on the other side. When the sellers break a support level, the buyers become discouraged and stop buying while the sellers continue selling. On the other hand, if the buyers start selling too, the decline accelerates even more.
As you can see in the chart above, the 1.16 support level in USD/JPY which has provided support several times in more than a year was finally broken. So the right forex strategy is to trade the break, meaning, in this case, to sell when the 1.16 support level was broken. As you can see, the support and resistance trading strategy is very important. It works well and is very simple, so there is potential to make a nice profit using this trading strategy.
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About the author

Skerdian Meta // Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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