Support and resistance is one of the most basic concepts of forex trading. All technical analysis of indicators and signals are central to forex trade. These terms are mainly used by traders while speaking about price levels on charts. These charts tend to act as obstacles which try to prevent the price of an asset from getting shoved into a particular direction.
At first, the idea and explanation behind correctly identifying these levels would seem quite easy. However, upon closer inspection, one can see that the whole idea of “support and resistance” is quite multi-layered as they come in various and different forms; and it gets progressively more difficult to master than it would appear at first sight.
An expansion of the terms ‘Support’ and ‘Resistance’
- When the price passes the resistance point, that area could potentially become a support point and vice versa
- The more often price tests a resistance or support point without breaking through it, the stronger the area of (support/resistance) becomes.
- When a support or resistance point is broken, how far price moves depends on how strongly the broken support or resistance had been holding.
Another important concept that we need to understand while understanding the subject of ‘support and resistance’, is regarding trendlines. There is a certain constant level, which prevents an asset’s price from moving higher or lower. This static barrier can be called one of the more constant forms of support/resistance.
However, the prices of currency pairs are usually seen to move (trend) up and down; so it is quite common to find price barriers fluctuating with time. That’s the main reason why one needs to understand the concepts of support and resistance. If the market is found to be on an upswing, high levels of resistance are formed, since the price action gradually starts to slow down. This is largely a result of profit-taking or big uncertainties in any sector. As a result, the price action is found to undergo drop-offs, which create short-term peaking before going down again.
For more understanding on trendlines, check out this article.