All About Forex Support and Resistance Levels

support and resistance

Traders use the terms support and resistance as part of the technical analysis of chart patterns. Support and resistance levels stop the prices of assets from going in a specific direction by acting as barriers. However, this is only the preliminary explanation of some intricate concepts. Since support and resistance can have different forms and require expert navigation, it is best to read up in advance. 

Support and Resistance

Support is a situation when a price level is on the downtrend and might be paused. The pause can be expected because of the accumulation of interest in the asset or demand for it. That means that as the prices drop, the demand for each share rises. This leads to the formation of a support line. 

As and when support lines form, resistance zones also come up with the sale of interest at increased prices. The price levels within these identified support or resistance zones act as exit or entry points. When prices attain a level of support or resistance, they follow two possible trajectories. They either retreat from the support or resistance level or continue in the price level’s direction. In the latter case, prices continue until the next support or resistance level is hit. 

Certain trades are timed based on predictions that the support and resistance zones won’t be disrupted. Traders are allowed to estimate the direction a price will take and find out how accurate their judgment is. In case the price does not move in the right direction, the position can be closed to minimize loss. In case the price moves in the right direction, profit has chances of being greater. 

Some price levels act as obstacles for traders wanting to influence the price of an asset in a specific direction. For example, if a trader expects prices of a share to rise, but they won’t rise over a certain level. This is a level of resistance, and it becomes a kind of ceiling for the price levels.  

On the other hand, support levels become the floor for the price levels to fall to. The support levels ensure that prices won’t fall any more downward. By identifying support levels, traders can seek out opportunities to buy shares. Then it is possible to push price levels upward from the support level. 

Trend Lines

Trendlines and trending prices allow traders to understand the tendencies of price levels. While support and resistance levels are static barriers, an asset’s price usually trends downwards or upwards. As a result, these barriers are also subject to change over time. 

An upward trend in the market means that resistant levels come into existence. This happens as the price action retards and then begins moving in the direction of the trend line again. This phenomenon occurs due to uncertainty or profit-taking in a given sector. As a result, the price action tends to plateau or even experience a drop in the stock price. 

Some seasoned traders will observe the prices of a security and its movement downwards towards the support trend line. This is because past evidence suggests that the support level is an area below which prices usually don’t fall. 

Traders will also look out for declining peaks when the market is on a lower trend. They will try to link these declining peaks on a trend line. Traders will then wait for the price levels to reach the trend line. Once the asset begins facing selling pressure, they might try to enter a short position. This can be advantageous since this zone has influenced the price level to fall previously. 

A support or resistance of a price level is considered more firm the less it has moved beyond that level. This applies to cases where the support or resistance was determined with a trend line or otherwise. At these levels, traders are more assured of the underlying worth of any asset. Given that the volume usually rises exceptionally, traders can no longer push the prices downward or upward. 

However, it is important to keep in mind that actual traders and investors are subject to emotional factors and errors. 

Trend Channels

Trend channels are a group of trend lines that run parallelly. They are determined by fluctuations in the price action of an asset. Trend channels are also referred to as price channels and are formed when prices are ranging between two trendlines. To better understand upwards and downwards trends, trend channels can be charted out on graphs. 

For bullish trends, the trend channel line is plotted on top of the price action. In such cases, the trend line is below the price movement. For bearish trends, the trend channel is below the price movement, and the trend line is on top. 

Trend lines are often seen as entry signals. That is because they act as support levels for bullish trends and resistance levels for bearish trends. An entry signal indicates when a price level pushes the trend line but does not cross it. In such cases, the traders can enter in the direction of the trend. They can place a stop loss at the bottom of the trend line to avoid losses. Consequently, they can keep the other trend line as the price goal for collecting a profit.

This means that in an upward trend channel, traders can use the trend lines as reference points. The lower trend line can be seen as the entry point and the upper trend line as the target. A long position can be entered in such cases. 

Often, trend channel lines form countertrend entry signals. This means that in an upward trend channel, many traders might use the upper trend line as the entry point. This will act as a countertrend, and a short position can be entered in such cases. The lower trend line will be seen as the target position.

Types of Trend Channels

Trend channels, just like trends, can be ascending, descending, or sideways in nature. Ascending channels are those which fall in the higher highs and higher lows category. Descending channels fall in the lower highs and lower lows category. Lastly, sideways channels are ranging and form a horizontal channel. 

In case the slope of a trend line and trend channel no longer remain parallel, a triangle can be formed. A descending triangle is formed from the trend channel when the transition is made from parallel to convergent lines. An ascending triangle is formed when the transition is made from parallel to divergent lines. 

How to Trade Support and Resistance

Once you know how the asset prices usually move, you can make use of support and resistance analysis. Keep in mind that certain support and resistance levels might be less stable than others. Minor levels are easily disrupted, while major levels are stronger and less likely to be broken. 

Trend lines are also closely related to support and resistance levels in the market. Once you understand how trend lines and ranges work, you can use this knowledge when placing trades. 

Trade-Based On Support And Resistance 

You can trade based on support and resistance by following certain patterns or rules. The general practice is to buy assets when their price is near the support level. That is when they see uptrends. This pattern or range on the chart indicates pricing that will rise. 

On the other hand, you should sell or sell short near resistance levels. These are prices that are seeing downtrends. This pattern or range on the chart indicates pricing that will decrease. 

When using support and resistance to trade, you can understand long term trends. These trends are important for trading a chart pattern or range. With the help of the trend, you can better understand the direction you should trade-in. 

If the trend is downwards and a range starts to develop, you should go for short-selling. It is best to short sell at range resistance rather than purchasing at the level of range support. Downtrends indicate that short sales are more likely to generate a profit as opposed to buying. Upward trends will result in the formation of triangle patterns. In such cases, it is favorable to buy close to support levels in the triangle patterns. 

Keep in mind that while selling close to resistance and buying near support is profitable, this is not guaranteed. Since support or resistance may not remain stable, profit can’t always be assured. It is thus best to ensure that the market is following the trends you are betting on. 

Those planning to buy near support should check for a confirmation of concentration in the support zone. They can buy once the price rises above the level of the concentrated area. This movement is important because it ensures traders that the price is still following certain trends. It also indicates that the price is beginning to rise higher from the support zone. 

Those planning to sell near resistance should follow similar patterns of trading. They should check for a confirmation of concentration in the resistance zone. They can then enter a short sell trade when prices fall lower than the level of the concentrated area. 

It is recommended that you put a stop loss multiple ticks (or pips) below the support level while buying. Similarly, you should put a stop loss a few cents or ticks above the resistance level while shorting. 

When you are waiting for concentration to occur, put a stop loss a few ticks below the concentration while buying. While selling put the stop loss a few ticks above the level of concentration. 

Always have a target price ready beforehand, so you know when to exit on a profit after entering a trade. In case you are buying near support, it is best to exit just as the price level touches major resistance. In case you are shorting, exist just as the price level faces major support. It is also possible to exit in cases of minor support or resistance. For instance, when buying near support in ascending channels, it is beneficial to sell at the top of such channels. 

Depending on the market trends, you may profit more if you wait for a breakout. This means you should sell in cases of minor support or resistance. If you choose to buy near triangle support for uptrend patterns, hold off for a bit. Wait until the trade crosses the triangle resistance and follows the patterns of the uptrend. 

In some cases, old support levels can become new resistance patterns. This is also applicable the other way around. While this does not always occur, it is possible under certain conditions. One such condition is a second chance breakout situation. 

False Breakouts

There can be cases when the price levels move a little more than you predicted. This is not a regular phenomenon. However, when it occurs, it is known as a false breakout. You could have analyzed the support to be $15, then the price fell to $14.97 and began rallying. This would be an example of a false breakout. 

False breakouts are possible since support and resistance levels are general zones and not exact prices. As a result, there can be some variance in the price actions in proximity to the support and resistance. 

Moreover, false breakouts are a great opportunity for trading. Some traders strategize by waiting for a false breakout. Then they enter the market once it has occurred. 

For example, you will have to wait till the trend is upwards and the price is bouncing back towards support. Continue waiting till the price goes lower than the support level and rises over support again. You can follow this pattern of trading for downtrends as well. Wait for the price to break through the resistance, then sell when the price goes lower than the resistance again. 

However, there are certain disadvantages to this approach since a false breakout may not necessarily occur. If you choose to wait for one, you might miss out on other favorable opportunities. Generally, you should avail of trading opportunities as they appear. 

As for placing the stop loss, maintain some distance from support and resistance levels. This is because false breakouts will occur infrequently and have a low chance of hitting your stop loss. 

New Support and Resistance Levels And Adapting Trading Techniques 

It is important to remember that support and resistance are always subject to change. Your trading techniques and decisions will accordingly have to keep up. 

For upward trends, you should keep track of the last high and the last low levels. If the price action goes below the lowest low, a possible change might be occurring. In case the price action goes above the highest high, the trend is only reconfirmed. It is recommended that you focus on the support and resistance levels at the current stage. Keep in mind that trends will face challenges in strong zones. While prices might breakthrough ultimately, they could take some time. 

On your chart, you should note down strong support and resistance levels. They have chances of recurring if prices start reaching those zones. Once you notice that they have lost relevance, take them off your chart. They will be less relevant once prices breakthrough major support or resistance zones and keep moving. 

You should also mark the minor support and resistance zones on your chart. You will be able to better understand the trends, chart patterns, and ranges. Minor levels also tend to lose importance faster, and newer minor levels will come up. As and when new support and resistance areas arise, remove the older lines since the price will have crossed them. 

For day trading purposes, focus only on the daily figures. Do not get confused by the support and resistance of levels from other days. In attempting to follow all the trends, you might overload yourself with irrelevant information. 

Trading based on support and resistance requires some amount of expertise. You should try to isolate chart patterns, ranges, and trends by using a demo account. With practice on a demo account, you can understand how to place stop losses and set price targets. As you continue gathering profits with these techniques, you can transfer to a live account. Try to keep up your profits for a few months before you transition. 

Summary: Trading Support and Resistance

Support and resistance levels are an important part of market analysis. They are used to understand whether certain price levels will be reversed or continue along with a trend. While support levels form as barriers during a downtrend, resistance levels form as barriers for uptrends. Support is generated when there is a concentration of demand, while resistance is generated when supply is concentrated. 

Psychological and emotional factors also impact the way support and resistance levels are perceived. The market history of a certain price level is analyzed subjectively by certain traders. They consider the past, present, and future trends of the market in this case. 

With the help of trend lines and trend channels, support and resistance levels can be better understood. If you are planning to trade support and resistance, chart out patterns in price movement. You should consider both major and minor support and resistance levels. 

As you slowly gain expertise, you will be able to make more successful trades. These techniques will add to your overall trading experience. To get proper knowledge about trading and the market, open a demo account with IC Markets or eToro today!