The role of support and resistance levels in forex trading

  • By Learn CFDs

  • September 7, 2018
  • 12:00 am BST

Support and resistance is a type of indicator formed by technical analysis in the trading industry. It can be seen as a barrier that indicates trading limits or reveals trends. As with all the markets, traders need a reliable strategy and the necessary forex, commodities, cryptocurrency or CFD advice in order to increase profits successfully. This specific piece of advice makes use of the approach to trading whereby certain points are seen as areas for dispute. As prices fluctuate through these points, they will face restrictions and obstacles, giving traders insight into their trade decisions.

The basis of support and resistance trading

The resistance aspect refers to an upper obstruction toward the end of what is known as a bullish trend. The resistance indicates a reversal of the price climb and reveals that there are more sellers than buyers on the market. Support is a lower blockage near the end of a bearish trend. This indicates a reversal in the trend whereby the market will begin to increase for a certain amount of time.

These support and resistance levels are easy to recognize when analyzing charts and data. Traders do not need advanced skills or experience in order to track movements and use this strategy successfully. These indications are estimates and not precise, but they do give a good idea of potential trend directions and make for a straightforward analysis method. These subsequent barriers that support and resistance reveal are temporary, requiring continuous updates as trends change. The more often these levels prove to be accurate, the more reliable they are. As with all trading strategies, traders need to use the resulting information wisely and in conjunction with other techniques.

An example of this concept in the real world would be a person trying to move past a wall that has no openings and is solid. This may seem impossible, but if they succeed, they might find themselves trapped on the other side of this barrier. In the same way, a resistance level can become a support level as conditions change. Although this is not a method with guaranteed results, its diversity can prove beneficial when used correctly.

Support and resistance is one of the top technical indicator strategies used by forex traders. Like the methods of trend lines, candlestick charts, price action and moving averages, this technique is both visual and simple, making it easy to apply. In order to spot support and resistance, a line is drawn on a chart where two top or bottom pricing levels can be seen. These lines become the barriers mentioned above and allow for the tracking of trends and possible future moves.

Breaking the levels

If a support or resistance level is broken, the price value will continue to change on the other side of that level. If a support level is broken by the seller, the buyer may be put off and stop buying. This situation can cause a bearish movement, which would attract more sellers. The movement could decline even further if buyers also begin selling. To put it simply, a break in the support levels will accelerate a decline.

Forex traders should learn to monitor these levels and recognize any breaks. A wise strategy is usually to trade the break, selling as soon as the support level begins to decline. This strategy may be simple, but it can work quite well as a forex market indicator and guide trading decisions. As with most strategies, the aim is to reduce risk and increase gains. Although no strategy can ever guarantee profits, this one forms a key part of a carefully developed forex strategy.