Support and Resistance in Online Trading
This article explains what are support and resistance levels, how to identify them and how to use them in a trading strategy.
Identifying Support and Resistance Levels
Two of the most fundamental concepts used to understand Forex charts are support and resistance levels. Support and resistance levels help to understand the price movements in trading charts and are used to make knowledge based trading decisions.
Price support is a level that prices would normally stay above. Chart 1 shows that prices tend to remain above the support line, which is represented by the blue line located below the candlesticks. Price resistance, however, is a level that prices tend to stay below. As illustrated in chart 1, prices do not exceed the top resistance level line.
Support and resistance levels depend on traders’ perceptions. If traders perceive prices as excessively low, the number of buyers would exceed the number of sellers and prices will rise.
However, at some point in time, traders would perceive prices as excessively high. At this point, the number of sellers would rise and prices may start to decline. This point is the price resistance level.
A trader is advised to cautiously examine the market before making trading decisions. Inexperienced traders may identify support and resistance levels inaccurately and place inappropriate orders.
Hence, discussing the relevant market opportunities with a Forex broker is always a good idea before trading.
Support Becoming Resistance
Support and resistance could be at the same level, depending on the specific point in time. A support level can become a resistance level once it is breached.
In chart 2, 1.46090 functions as the support level from January 6th to January 7th when the EUR/AUD moves below 1.46090 and becomes the resistance level. As illustrated in the chart, the currency pair tends to remain below the new resistance level from January 7th.
The Significance of Resistance and Support
Resistance and support levels are used to indicate whether prices will rise or fall and to make logical trading decisions. For example, if a trader knows where a resistance level is situated, he may wait for the exchange rate (or the price of an asset) to reach this level before placing short position on the asset in question.
As illustrated in chart 1, a trader who is interested in the EUR/USD may wait for the exchange rate to approach 1.14502 (the resistance level) before placing short positions on the currency pair.
Likewise, if a trader knows where a support level is located, he is likely to wait for prices to reach this level before placing long positions. Referring to chart 1, a trader may wait for the exchange rate to reach 1.12791 (the support level) before placing long positions on the currency pair.