Support and Resistance

Support and resistance are two of the most important topics when it comes to technical analysis in the forex market. These refer to the price levels at which there seems to be a barrier beyond which the price of a currency pair may not keep falling or rising. They are both actually fairly simple to understand, however, many people have the perception that they are too difficult to try and understand.

Support and resistance are measured in levels, mainly in price areas or zones, instead of a particular single price in which supply and demand meet and are of equal strength. To better understand this, we must first know what supply and demand is when trading forex. Supply is the selling of the base currency and demand is the buying of a currency. Price changes occur when there is an imbalance between the supply and demand.

Understanding Support

When it comes to forex trading, support is the level where demand has acquired enough strength to stop the prices from decreasing further. When the price gets cheaper, there are more buyers wanting to hold the currency and few sellers wanting to get rid of it. As prices reach the support level, most of the time the supply and demand become even or the quantity of buyers exceeds the number of sellers.

On some occasions though, support levels can be broken. This means that the selling pressure is still strong and the bearish motive has taken over the bullish inclination. At this point there is more incentive to sell and the buyers no longer want to acquire the currency. If the support holds, there will be a bounce from the support and the bull market ideal will have come out on top.

The levels of support are established under the current price, but since levels are not set at an exact price, volatility could cause prices to drop some below the level without causing it to break. This is a big reason why traders like to establish support zones. A small decrease in levels will not cause an indication of a breakout. Most will set up points to confirm that a support level has been broke.

Understanding Resistance

In trading forex, understanding what resistance is and how it affects a trader is vital to success. Resistance is the level in which selling pressure acquires enough strength to stop the price from a further increase. As a price goes up and heads closer toward resistance, more sellers will want to enter the market and fewer buyers will be willing to buy.

When the price reaches the resistance level, just like the support, both sides will tend to get even and sellers may overcome the number of buyers. This will cause a bounce back and actually drive the prices downward.

If resistance does not hold and a new buying surge presses the market, the price will break above resistance, showing that the bullish market overcame and bearish marketers will not be interested in selling anymore. This will cause buyers to buy at higher prices until they reach a further resistance level.

The way that resistance levels are established is that they are always established above current price but in the same way that happens with support levels. Think of these levels more as a zone, where small rallies or peaks throughout the level shouldn’t be considered a breakout unless there is further confirmation.