Support and Resistance forms the foundation for any solid Forex trading plan. Once you have a firm grasp of support and resistance in Forex price charts, you’ll be head and shoulders above the average Forex beginner (but will still be at the feet of the masters for now…).
Remember that the trading Forex market is a financial game, like tug-of-war, between the bulls and the bears. The bulls try to pull prices up and up, while the bears try to bring them down.
The market only moves in three directions: upward, sideways, or downward.
Highs In The Forex Market Charts
Highs are candlestick formations where the candle’s high point (usually the top of its upper wick, unless the candle does not have an upper wick in which case the high point would be the open or close) is higher than the previous two and subsequent two candles.
Levels of Resistance
Not all highs in the Forex are levels of resistance, but all levels of resistance are highs.
In order to create a level of resistance, the market must be achieving higher highs. The term resistance comes from the idea that at that price level, traders are resisting buying at the higher prices.
At the resistance level the bears sell enough and the bulls resist buying enough that an uptrend may be interrupted and reversed.
To identify resistance levels, start from the price the market is currently at (at the right of the chart) and work backwards (moving right to left) pinpointing higher highs. Finding levels of resistance is like building a staircase that rises backwards, where each stair is a new level of resistance.
Lows In The Forex Market
Lows are the opposite of highs. They are candlestick formations where the candle’s low point (usually the bottom of its lower wick, unless the candle does not have a lower wick in which case the low point would be the open or close) is lower than the two previous and two subsequent candles.
Levels of Support
As with highs, not all lows in the Forex are levels of support, but all levels of support are lows. In order to qualify as a level of support, the low must be lower than the previous low.
Support is a low and a price level where the bulls start buying enough to interrupt and reverse a downtrend.
In order to identify support levels, start from the price the market is currently at (at the right of the chart) and work backwards (moving right to left) pinpointing lower lows. These lower lows are levels of support. Draw a line at these lows to the left until you hit the next candle, then look for the next lower low (the next level of support).
When the market achieves lower lows (creates a new level of support) it is said to be breaking support.
How To Trade Based on Support and Resistance Levels in the Forex Market Charts?
If you are a bull then you want to see the market making higher highs, taking out previous levels of resistance. Set your stop loss order at the last low or the last level of support.
If you are a bear then you want to see the market making lower lows, taking out previous levels of support. In this case, set your stop loss order at the last high or the last level of resistance.
Understanding the basics of support and resistance forms a large part of the foundation needed to become a successful Forex trader. In my next blog post, I’ll give you some trading rules for interpreting Forex levels of support and resistance.
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