When you get into forex trading, you are likely to often come across the terms support and resistance. The former stands for an area where the price of an asset tends to stop falling, and the latter an area where the price tends to stop rising. However, there is so much more to support and resistance beyond the simple definition offered above before one can start utilizing them to make trading decisions on a chart. For starters, to make the best use of support and resistance, you need to understand how asset prices typically move, then you can interpret support and resistance from that framework. Another thing you need to keep in mind is there are different types of support and resistance, such as minor and major. Minor levels are expected to be broken, while strong levels are more likely to hold and cause the price to move in the other direction.
How To Use Trendlines
Support and resistance trading can be highlighted by either horizontal or angled lines known as trendlines. If the price stalls and reverses in the same price area on two different occasions in succession, you can draw a horizontal line to show that the market is struggling to move past the area. That can be the support or the resistance. Think of it as the house floor and ceiling; the bottom part is the support, the upper part is the resistance. Once the resistance is broken, it becomes a support, and the price can aim for the next resistance level and vice versa.
Also, as you chart, you can draw trendlines. For instance, the price will make higher highs and higher lows in an uptrend. And in a downtrend, the price will make lower lows and lower highs. You can connect the highs and the lows during a trend. Then extend that line out to the right and see where the price may potentially find support or resistance in the future. These are known as dynamic support and resistance lines and help identify trends, ranges, and other chart patterns. They provide you with a view of how the market is moving at the time and what could happen in the future.
Major And Minor Support And Resistance Levels
Minor support and resistance levels do not hold up. For example, if the price is a downtrend, it will make a low, bounce, and start to drop again. That low can be marked as a minor support area because the price did stall out and bounce off that level, But since the trend is downwards, the price is likely to fall through that minor support level without much problem eventually. Areas of minor support or resistance provide analytical insight and potential trading opportunities. Using the example above, if the price drops below the minor support level, you will know the downtrend is still intact. But if the price stalls and bounces at or near the former low, then a range could be developing. If the price stalls and bounces above the previous low, then you might have a higher low, indicating a possible trend change.
On the other hand, major support and resistance areas are price levels that have recently caused a trend reversal. If the price was trending higher and then reversed into a downtrend, the price where the reversal took place is a strong resistance level. Where a downtrend ends and an uptrend begins this is a strong support level. When the price comes back to a major support or resistance area, it will often struggle to break through it and move back in the other direction. For example, if the price falls to a strong support level, it will often bounce upward off it. The price may eventually break through it, but typically it retreats from the level several times before doing so.
The most appropriate way to trade using support and resistance is to buy near support in uptrends or parts of ranges or chart patterns where prices are moving up and sell/sell short near resistance in downtrends or the parts of ranges and chart patterns where prices are moving down.