One of the most important principles in forex trading is support and resistance levels. Many technical tools rely on support and resistance lines to locate or confirm trade setups, and they are often one of the first trading tools that beginning traders learn.
Support and resistance levels may take many forms, and there are even trading strategies that rely only on these levels.
Given the importance of this topic, we prepared a full article that covers all you need to know about it and shows how to calculate support and resistance levels in forex.
Let’s start with an explanation of what support and resistance levels are. In forex, a support line is a level below which the price has difficulty passing, indicating that the price may once again function as a barrier for sellers. Many buy orders are often situated around important support levels, which is why the price looks to be bouncing off those levels. In other words, that price level is “providing” the price.
On the other hand, a resistance level is similar to a support level, except that it forms on the upside. A resistance level is a price that the market has had difficulty breaking above in the past, indicating that the same price level might function as a barrier to the market’s upside in the future.
Traders often place sell orders around important resistance levels, which may accelerate a downward movement after the price reaches the resistance level.
Many technical tools rely on support and resistance levels to identify possible trade setups. These levels represent pure price movement and are very simple to understand and trade on, which is why so many forex traders swear by support and resistance trading in forex.
In forex, there are many methods for identifying support and resistance levels. While horizontal S&R levels are the easiest to identify, other levels such as round number psychological levels, trend line S&R levels, and Fibonacci retracements need a trader to use certain tools to identify.
Here is a list of the most important forex support and resistance levels:
Horizontal support and resistance levels are located horizontally in relation to previous support and resistance levels, making them relatively easy to spot.
Traders often trade on a bounce from or breakout of a support or resistance level. A large number of sell orders located just below a resistance level and just above a support level make it difficult for the price to break through those levels, finally leading to a bounce off those levels.
On the other hand, a break of such levels is frequently accompanied by significant buying or selling momentum since buy orders are located just above resistance levels, and sell orders are located just below support levels. Pay this attention the next time you’re trading horizontal support and resistance levels.
The psychological effect that round numbers have on market participants is referred to as round number support and resistance levels. When an exchange rate reaches a round number, such as 1.00, 1.10, 1.20, 1.25, or 1.5, these levels often operate as support and resistance for the price, depending on which side the price is approaching.
This implies you may set your stop loss and take profit orders around round numbers, but be prepared for a price bounce off those levels.
We’ve talked about horizontal levels of support and resistance and round number psychological levels, which are also horizontal levels. Now it’s time to explain how trend lines can act as support and resistance for the price.
Trend lines connect lows that are higher during uptrends and highs that are lower during downtrends. They are an important tool for traders who try to follow trends. However, they can also be used to identify potential price levels where the price might bounce.
Every time the price gets close to a trend line that is going up or down, there is a good chance that the trend line will support the price during an uptrend or stop the price from going down during a downtrend.
It’s important to keep in mind that for a trend line to be important support or resistance line, the price has to follow the trend line at least three times.
Fibonacci retracement levels are a special kind of support and resistance level that tries to identify a price level where a market correction might end. Currency pairs tend to move in trends, and each trend is made up of highs and lows that look like a zig-zag on price charts.
A market correction is a change in price that goes against the trend. It happens after a strong move in the direction of the trend, and the Dow Theory says that market corrections usually reach about 50% of the impulse wave.
The famous Fibonacci sequence of numbers was found by the Italian mathematician Leonardo Fibonacci in the Middle Ages.
You may have heard of the Fibonacci sequence, which goes like this:
1,1,2,3,5,8,13,21,34… In essence, each number is the sum of the two numbers that came before it. Even more interesting is that if you divide two consecutive numbers in the Fibonacci sequence, you’ll always get the same answer: 0.618. This is called the Golden Ratio and occurs in many places in nature, including the human body.
Now, let’s start trading once more. Since the Golden Ratio is common, people in the markets think it could also work well in the financial markets. Traders think that a market correction of 61.8% of the impulse wave and other important Fibonacci ratios like 23.6% and 38.2% could act as an important support and resistance level.
If you use the Fibonacci tool from the recent low to the recent high, the Fibonacci retracements you draw on your chart could be important price levels where the market could bounce back and return to its underlying trend.
On the EUR/USD pair, you can see that the price found support at the 61.8% Fibonacci retracement level. But remember that Fibonacci retracement levels don’t have to be support and exact resistance lines. Instead, the price can go back to where it started at so-called support and resistance levels.
The most important of these are between the 38.2% and 61.8% Fib levels. So, think of these levels more as areas or zones than as exact lines. A better choice of name would have been support and resistance zones or areas of interest.
The most basic way to use support and resistance in trading is to buy near support in uptrends or parts of ranges or chart patterns where prices are moving up and to sell/sell short near resistance in downtrends or parts of ranges and chart patterns where prices are moving down.
Even when trading a range or chart pattern, it helps to find a longer-term trend. The direction of the trend shows which way to trade. For example, if the trend is buying down, but then there is a range, it is better to sell short at range resistance than to buy at range support.
The downtrend tells us that going short is more likely to know our profit than buying. If the trend is up and a triangle pattern forms, the best place to buy is near the triangle pattern’s support.
You can pay money by buying near support or selling near resistance, but there is no guarantee that the support or resistance will hold. So, you might want to wait for some sign that the market is still waiting in that area.
If you want to buy near support, wait for a small consolidation in the support area, and then buy when the price breaks above the high of that small consolidation area. When the price moves like that, it tells us that the price is still respecting the support area and that the price is starting to move up from support. When selling at resistance, the same concept holds true.
Wait for a small consolidation to happen near the resistance area. When the price drops below the low of the small consolidation, enter a short trade.
When buying, place your stop loss a few cents (or ticks or pips) below support. When selling, place your stop loss a few cents, ticks, or pips above resistance.
If you’re waiting for a consolidation, put your stop loss a few cents, ticks, or pips below the consolidation when you buy. When selling, the stop loss goes a few cents, ticks, or pips above the consolidation.
When making a trade, you should have a price in mind that you want to sell to make money. If you buy near a level of support, you might want to sell just before the price reaches a strong level of resistance.
If you are shorting at resistance, you should get out right before the price reaches strong support. You can also leave the market at minor levels of support and resistance. For instance, if you buy at support in a channel with a rising trend, you might want to sell at the top of the channel.
In some situations, you may profit more if you let a breakout happen instead of selling at minor support or resistance. For example, if you buy near triangle support during a larger uptrend, you might want to hold the trade until it breaks through triangle resistance and continues the uptrend.
Old support can become new resistance, or opposition can become old help. This isn’t always true, but it usually works well in situations like a second chance breakout.
Furthermore, support and resistance levels are crucial for price action trading. When a price action entry signal forms at a key level of support or resistance, it can be a high-probability entry scenario.
When we talk about support and resistance levels in forex trading, it’s important to talk about an interesting thing about them: their roles change. When a support level breaks, whether it’s a horizontal, round number, Fibonacci, or trend line support, that support becomes a resistance level in the future.
In the same way, a resistance level that has been broken becomes a support level for future trading. This idea of support and resistance levels is at the heart of pullback trading, a popular way to trade. Basically, a trader would wait for the price to retest a broken support level (now a resistance) or a broken resistance level (now support) before buying or selling in the direction of the breakout.
The following chart shows this fascinating concept.
The weekly EUR/USD chart shown above shows horizontal support and resistance levels. Most of the time, higher timeframes, like daily or weekly, are more reliable when it comes to support and resistance in forex trading.
As you can see, the key resistance and key support lines are located above and below less important levels, respectively. When resistance broke, it turned into support, and when support broke, it turned into resistance.Forex Tester - A worthwhile forex trading tool? — 2023
The minor levels of support and resistance don’t hold. For example, if the price goes down, it will reach its lowest point, bounce back up, and start to go down again. This low can be thought of as a small area of support because the price did stop and bounce off it. But since the trend is down, it shouldn’t be too hard for the price to fall through that small support level.
Minor areas of support or resistance can be used for analysis and to find trading opportunities. In the above example, if the price falls below the minor support level, we know that the downtrend is still going strong.
But if the price stalls developing and bouncing at or near the former low, this could be the start of a range. If the price stops moving and bounces back above the previous low, we have a higher low, which signifies that the trend might be changing.
Major support and resistance areas are price levels that have recently caused a trend reversal. If the price was going up and then changed direction and started going down, the price where the trend changed is a strong resistance level. A strong support level is where a downward downtrend ends, and an upward trend starts.
When the price comes back to a major area of support or resistance, it is often hard for it to move back in the opposite direction. For example, if the price falls to a strong support level, it will often bounce back up from there. Price may break through it at some point, but usually, it goes back and forth a few times before it does.
Asset prices often go in a slightly different direction than we expect. This doesn’t happen all the time, but when it does, it’s called a “false breakout.” If our analysis shows that there is support at $10, it is possible that the price could drop below $10, to $9.97 or $9.95, for example, and then start to rise again. Support and resistance are not exact prices; they are areas.
You can expect the price to move in different ways around support and resistance. It’s not likely that it will stop at the same price as before.
False breakouts are great trading opportunities. One way to trade is to wait for a false breakout and then get into the market after it occurs. For example, if the trend is up and the price is pulling back to support, you should let the price break below support and then buy when it starts to rally back above support.
In the same way, if the trend is down and the price is pulling back to resistance, let the price break above resistance and then sell short when the price starts to drop below resistance.
The downside of this method is that it doesn’t always lead to a false breakout. You might miss out on good trading opportunities if you wait for one. So, it’s typically best to take trading opportunities as they come. If you catch a false breakout trade every now and then, that’s a plus.
False breakouts happen sometimes, so your stop-loss should be a little bit away from support or resistance. Occasionally, a false breakout is less likely to hit your stop-loss before moving in the direction you expected.
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Support and resistance change over time, so the trades you make based on them must also change. In an uptrend, it’s important to look at the last low and last high. If the price makes a lower low, it could mean that the trend is changing, but if it makes a new high, it helps show that the trend is still going up.
Pay close attention to the levels of support and resistance that are important right now. Trends often run into trouble in areas where they are strong. They might get through eventually, but it often takes time and more than one try.
Mark major levels of support and resistance on your chart because they might come back into play if the price gets close to them. Delete them when they are no longer useful, like when the price breaks through a strong support or resistance area and keeps moving well past it.
Mark on your chart the minor levels of support and resistance that are important right now. These will help you figure out what is going on with the current trends, ranges, and chart patterns.
As new minor areas of support and resistance form, these minor levels become less important very quickly. Keep drawing the new support and resistance areas, and erase the support and resistance lines that are no longer useful because the price has broken through them.
Focus on today if you’re day trading. Don’t spend too much time trying to figure out where support and resistance were on prior days. Information overload can result when you look at too much information simultaneously. Pay attention to what is happening right now and write down today’s support and resistance levels as they form.
Trading off support and resistance takes a lot of practice. Work on finding trends, ranges, chart patterns, support, and resistance in a demo account, and then practise making trades with targets and stop-loss orders. Once you’ve made money with your support-and-resistance trading method for a few months, you should think about trading with real money.
Remember how we used the terms “floor” and “ceiling” to describe support and resistance? Continuing with the home analogy, security may be compared to a rubber ball that bounces around a room, hits the floor (support), and then bounces off the ceiling (resistance).
A ball that continues to bounce between the floor and the ceiling is similar to a trading instrument that is experiencing price consolidation between support and resistance zones.
Now suppose that the ball transforms into a bowling ball in mid-flight. If used on the way up, this extra force will push the ball past the resistance level; if applied on the way down, it will push the ball through the support level.
Either way, the bulls or bears require extra effort or enthusiasm to break through the support or resistance. When the price tries to go back up, a previous support level may become a resistance level, and vice versa. A resistance level may become a support level when the price briefly falls back.
Price charts enable traders and investors to visually identify areas of support and resistance, as well as provide clues about the significance of certain price levels.
They specifically examine:
The more times the price tests a support or resistance level, the more significant the level becomes. When prices continue to bounce off a support or resistance level, more buyers and sellers take note and make trading decisions based on these levels.
When steep advances or declines precede support and resistance zones, they are more likely to be significant.
For example, a fast, steep advance or uptrend will be met with greater competition and enthusiasm and may be halted by a more effective resistance level than a slow, steady advance. A slow advance may not attract as much attention. This is an excellent example of how market psychology influences technical indicators.
The greater the buying and selling volume at a certain price level, the stronger the support or resistance level is likely to be. This is because traders and investors remember these price levels and are likely to employ them again.
When there is a lot of activity on high volume and the price decreases, there will most likely be a lot of selling when the price recovers to that level since individuals are significantly more comfortable closing out a trade at the breakeven point rather than at a loss.
When levels are tested on a frequent basis over a long length of time, support and resistance zones become increasingly significant.
The more times support or resistance (SR) is tested, the weaker it becomes. A multi-touched level is more likely to break and have price move through it.
At support, the market turns around because buying pressure drives the price up. Institutions, banks, or smart money that trades in large orders could pressure the buyer to buy.
If the market keeps going back to support, eventually, these orders will be filled. And who will buy when all the orders have been filled? Note that higher lows into resistance usually result in a breakout (ascending triangle). Lower highs into support usually result in a breakdown (descending triangle).
A very popular way to trade on the forex market is based on support and resistance. These levels, which can also be found in other financial markets, are one of the most important things new forex traders should learn immediately. A support level is a price level that sellers have had trouble breaking below in the past. A resistance level is a price level that buyers have had trouble breaking above in the past.
Because of this, these levels can predict how market participants will act when the price returns to them. There are many different kinds of support and resistance levels.
This article has talked about horizontal levels, trend line levels, Fibonacci retracements, and psychological levels with round numbers. Other technical tools, like moving averages (the 200-day MA is an important dynamic S&R level), channels, pivot points, and so on, can also be used to find possible levels where the price could find support or resistance.
They are tools meant to assist you in focusing on important areas where prices may shift. So it all comes down to your strategy that interprets a level in a certain way.