Some traders like to ignore the value of technical analysis in trading and sometimes they are justified in doing so, in many markets it just does not work that effectively. The Forex market is however one of the best markets to utilize the benefits of technical analysis and support/resistance trading. The reason for this is that for today’s retail trader, the Forex market is actually what is known as a ‘blind’ market. This means that you are unable to clearly see the flow of buy and sell orders entering the market and what the order quantities are being transacted. The lack of this information makes technical analysis, and more importantly support and resistance, an important part of any Forex trading strategy.
Support and resistance levels can be recognized as points on a chart where the price has previously stalled, bounced or reversed or some other important level which is expected to affect the price action such as a significant round number. These levels can occur on short term or long term time frames. The more times the price has been affected, when encountering these price points, the stronger the level is said to be. For example, if price has tried to drop below a certain point many times but repeatedly failed to do so, this will be labeled as a strong support level. Forex Support and resistance levels are traditionally horizontal but there are also other kinds which travel diagonally, sometimes forming different patterns. Discover more information on Forex trading & Charts..
Forex Support Levels are areas which price cannot seem to break below. If a break does happen, it is usually temporary and the price will soon return above the level. Forex Resistance Levels are areas that appear to prevent the price from rising any further. These levels act like a ceiling and appear to force price back down when it tries to break above the level.
It is important to note that in Forex support and resistance trading the levels will not always hold, especially on short term time frames. While the market is in a strong trend, the levels will often be broken fairly soon after they are first established. This gives rise to the famous zigzag formations which you see in price charts. Occasionally these price will break through these support or resistance levels but that is not always the case. When the market is in a range or a trend that is coming to an end, Forex support and resistance levels can remain strong and stop price completely, sometimes even causing it to reverse and change direction.
When these strong areas of price support or resistance are broken in a strong upward or downward move in prices they can actually reverse their effect on price and areas that were once resistance will become support. The reverse is also true and a support level can be broken and then act as resistance after price moves through it and then returns to it from below briefly before continuing its journey downwards and away from the level. These are important trading setups for many experienced traders and ones you will see time and again while you learn Forex trading online.
The classic question of whether a level will break or hold is one that you will come across many times as you learn to trade Forex. These Forex support and resistance concepts are of course just tools which can give you clues about how price may behave at a certain level in the future. The levels themselves are also not set in stone. Price may move past a level, but this does not always mean that it has been broken. Even a close beyond a level does not guarantee a broken level though, many traders wait for the price to come back and re-test the level from the other side before placing a trade. This is often a high probability set up and one which allows you to place support and resistance Forex trades with a small stop loss and little risk. Visit here: http://forexrevealed.net/selecting-forex-software/
The support and resistance areas should be thought of as ‘zones’ rather than exact price levels. When examining Forex charts you will see examples of resistance or support where the price has turned around on several occasions, but the level where it stopped was not the same each time. It has however reversed in the same general area or zone. Using these zones will allow you to avoid losing trades due to ‘false’ breakouts where the price temporarily passes a level but then quickly reverses and continues to respect the support or resistance area.
Forex support resistance levels are a key part of technical analysis in currency trading. You will find that a very large number of professional traders use them during their daily activities, and to great effect. These levels are most effective when combined with price action, technical indicators and other pieces of information such as volume. It is however possible to develop a Forex support and resistance strategy which uses these levels and nothing else.