Most seasoned Forex traders use support and resistance. They utilize different ways to determine how to use this mechanism. Support and resistance works where there are aspects of demand and supply. Support in Forex refers to the situation whereby there is stoppage in falling of prices. When the demand for certain stocks is strong enough, buyers get committed to buy more but the sellers get reluctant.
Resistance happens when the Forex prices stop going higher. For example, you may find that supply is stronger enough to the point of making the sellers wish to sell more of their stocks, but the buyers get reluctant to carry out the trade. Since the Forex markets keep on fluctuating, support and resistance has to come in handy to help in striking a balance. Breaking a support or resistance level causes a reversal. That said, you may find that at a certain time, the price may go down below the support level. This brings about resistance.
On the other hand, a rise in price above the resistance level brings about support. A reversal has to happen if there is a movement of price past either the support or resistance level. That way, you may find that resistance becomes support due to the shifting of supply and demand. As Forex markets move in three ways, that is, in range, trends or consolidate, it is worth knowing how to determine and use these three different movements.
Different Types of Support and Resistance Levels
If there is a breakout in a support level, then support become resistance level. These levels are notably evident where there was unease in price going above the resistance level or below the support level. Find the types of levels down here.
- Dynamic support and resistance
Where there is a new period, the support and resistance levels keep on moving and changing their positions. Moving averages necessitate the drawing of these levels. On the moving averages, there are values that make support and resistance levels work. They comprise 50 MA, 100 MA and 200 MA.
- Trading range
Let’s take an example of a ranging market. The lower support and upper resistance lines are vital. You can use them for determining and halting the stop loss options right below the support or above the resistance lines. A market that is capped by a lower support or upper resistance lines can easily give you the range of the same. Now let’s say you come to find the ranging market. You can decide to sell your stock when the price comes slightly near the resistance line. Conversely, let’s say you are the buyer. If the market goes near the support line, that’s the ideal time for you to buy some more stocks.
- Trading swing highs and lows
Well, if you belong to the old school, then this type of support and resistance level will mesmerize you. A lot of Forex traders find these as the simplest type of support and resistance level. They are not spottable in low time frames like hourly time rates. It’s more advantageous to identify support and resistance levels using the monthly then weekly charts. That way, it gets more easier to identify the daily charts. On the swing highs, you can note that resistance levels come in handy with barring a break up in prices. In the cases of support levels, they work on swing lows to bar the price from coming into a break down. Here is how it gets funny. You get to find that when a breakage in the support and resistance levels occurs, supports become resistances and vice versa.
- Stepping swing point levels in trends
If you love trend trading, then here is your type of support and resistance. The stepping swing point levels in trends mostly occur where the downtrends and uptrends. To gain more on this level, you may decide to place your stop loss order below a past resistance uptrend zone or above the previous support zone. To have the best experience in trading with these trends, you ought to mark the support and resistance levels as they emerge. That way, you may trade any pullbacks promptly. The support line immediately becomes a resistance when the support line breaks during the downtrend. That is the right moment that you have to wait for a pullback to occur. You’ll rest assured that sell opportunities are availed to you. Conversely, let’s take the instance of the resistance line. Where this line breaks during the uptrend period, it gets to be a support. You can wait for a little more time so that you can do a pullback.
The Importance of Support and Resistance
Like it or not, the Support and Resistance level serves an importance guidance to serious traders on the buying and selling price pressure. And to succeed long term, it’s always wise to know where the next support and resistance level is before jumping into any new positions.