Success in forex trading can be done by mastering how to trade off of support and resistance levels. It is important to identify these key levels when they take place. Having this skill is beneficial for traders with active trades who are after the best potential exit points.
Support defines an area below which price action of a currency pair is not able to go below following repeated contacts of the price action within that area. The support area often acts as the price floor since prices cannot move below the level. The importance of support is that buyers usually take control of the market at this point since they speculate that prices will head higher.
Resistance depicts an area above which price action of a currency pair is not able to go above following repeated contacts of the price action with that particular area. The resistance area will likely act as a price ceiling since prices cannot move above this level. The importance of resistance is that sellers begin to take control of the market at this point because they see the possibility that prices might start moving lower.
Support and Resistance in Forex Trading
Support and resistance levels can be used in trade entries and exits. It is important to determine if prices will suspend at key levels or support/resistance or break them.
If the price action suspends at these levels and are also tested, a reversal will tend to follow and this can be traded subsequently. But if a price action ends up breaking the key level due to a strong price action, then the standards of breakout trading should be applied and Limit orders are used for entry.
The nearest key level along the line of the trade for trade exits must constantly be used as the first profit target. As the price nears the target, the trailing stop can then be applied to see if the trade breaks this point and price is followed to the second key support and resistance level.
Proper identification and knowledge of how to start and exit trades with these support/resistance tools is advantageous. The levels mentioned can be recognized through the following setups.
Trend lines are straight lines that can be drawn to reach at least three areas of price highs or price lows. These can be used to outline support and resistance levels. Trendlines are often seen in chart patterns like triangles, channels, flags/pennants and wedges.
At times, only a single trend line can be traced either across price highs to form a resistance or across price lows in order to form a support. At other times, two trend lines can be drawn, which is one across highs while the other across lows.
At times, several entry and exit orders are placed in the price zones where round numbers are found. As a result of the heavy activity, which goes on at these levels when orders are placed around the round numbers, prices begin to suspend at those particular areas. This eventually creates support or resistance levels.
Indicators like Fibonacci levels, pivot points
Indicators are also able to form the basis of support and resistance. These include the moving average line, pivot points, the Fibonacci retracement/expansion levels and Fibo fans. Indicators can be used in combination with each other in order to gain the best possible result.