Lesson 1: FX Support and Resistance (Horizontal Price Levels)
Forex moves in a zigzag fashion. While it might appear erratic, a person who understands the concept of support and resistance will be able to make sense of the fluctuations.
Support and resistance are very important price levels. Because of their recurring value, traders incorporate them into trading strategies. The important rule for a trader to remember is to buy at support and sell at resistance.
Support is a price level where falling price is stopped and rises to a higher level. Price prints a V or U shape at support (see chart for illustration). It also resembles the shape of a valley. Resistance is a price level where rising price is stopped and falls to a lower level. Price prints an inverted V or U shape. It also resembles a mountain peak.
Psychology of a support and resistance
Actions of buyers and sellers creates price movements. If the strength of buyers and sellers were the same, price would go nowhere because the action of both groups negate each other. However, their strength are rarely the same. Indeed, that is because even within each group, expectations and actions are different and uncoordinated. Some have expectations that are stronger, some are more risk tolerant and some are just informed earlier or better than the others.
Support and resistance is self-fulfiling
Price fluctuates between levels when buyers and sellers wrestle with each other. Despite we cannot see them clearly, these levels exist. At a level where buyer are attracted to buy in a concerted manner, sellers take their profit and quickly exit. This puts a floor to the fall in price creates a support. At a higher level where buyers exit by taking profit, sellers are attracted to sell in a concerted manner. This puts a ceiling to the rally in price and creates a resistance. It is simple to imagine support and resistance as the ceiling and floor of a room.
After support and resistance were established, they become self–fulfilling. This is because buyers and sellers do not like to take unnecessary risks and are therefore willing to trade with each other between established levels. Their expectations are built around those support and resistance. They do not want to rock the boat unless there is a strong reason to change the expectation of one side.
Summarizing support and resistance
- Buyers and sellers have expectations when price reaches certain levels.
- Support and resistance were initially created by the action of buyers and sellers at the levels where their expectations are strongest.
- Buyers are strongest at support; sellers exit quickly.
- Sellers are strongest at resistance; buyers exit quickly.
- Support and resistance become reinforced when the market continues to react to these levels.
- When price goes above a resistance, it often becomes support; when price goes below a support, it often becomes resistance.
- Therefore support and resistance are interchangeable.
Forms of support and resistance
- Past levels
- Trendlines
- Pivot points
- Fibonacci levels
- Moving averages
- Bands or channels
Simple rules for the new trader
- Support and resistance are price levels.
- On a chart, they are turning points that resemble the peaks and valleys of a mountain.
- Not all supports and resistance are equal, some are stronger than others.
- Support and resistance exists in all timeframes; the higher the timeframe, the stronger the support or resistance.
- Round numbers are good support and resistance; they are easy to remember and can have psychological value. For example, the EURUSD at 1.5000.
- The more times a level that has acted as support and resistance, the higher its possibility of doing so again.
- Support and resistance in the forex market is typically a zone rather than a precise value – this is because forex trading often prints long ‘tails’ with the candlesticks. It is crucial to identify this zone so that stops that are employed do not get triggered too easily.
Support and resistance printed on 11-hour EURUSD chart
