Support and Resistance are some of the most used techniques in technical analysis. This is a concept that is easy to understand but difficult to master. Today, howtotradeblog will completely and accurately represent the use of Resistance and Support in Forex trading. All will be presented in a specific and easiest way for you to understand this market analysis technique.
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What are Support and Resistance?
Support & Resistance are historical price zones where the price reverses or slows down before resuming the trend. Especially, this behavior is likely to repeat in the future.
At zones where the price goes up and then adjusts down, the highest level before the adjustment is called Resistance.
On the contrary, when the market shows signs of a rebound, the lowest level before the rise starts becomes Support.
The more volatile the market is, the more Support and Resistance levels will be created.
In terms of psychology, Resistance is the price zone that investors are afraid of. On the contrary, Support is the price zone where investors are greedy.
Principles of Support and Resistance
This indicator have the following important properties that you need to understand.
Support and Resistance are price zones
A lot of traders mistakenly assume that these levels are specific prices. This leads to wrong trading decisions. Please remember that Resistance & Support are price zones.
+ Strong Support is the zone where prices cannot get through to continue to decline after many times of touching.
+ Strong Resistance is the zone where prices cannot break through to continue to increase after many times of entering.
Resistance and Support are considered levels
Talking about levels, there are 3 types of levels that make price adjustments including hard level (static level), soft level (dynamic level), and psychological level.
+ Hard levels (static levels): are fixed levels such as Support – Resistance, Trendline, and Fibonacci retracement levels.
+ Soft levels (dynamic levels): are levels moving along with the price path. They are indicators such as SMA, EMA, Bollinger Band, Ichimoku, etc.
+ Psychological levels: are numbers such as 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100.
The changeover in the role of them
This happens when the price breaks out of Resistance (or Support) to form a new trend.
Specifically:
+ When the price breaks out of the Support and goes down, the Support zone, after being penetrated, will become the Resistance zone as the price retests (the price retests the level before falling further).
A practical example of the changeover from Support to Resistance:
When the price fails to fall below the lowest low, a Support zone is formed. After many touches, the price has broken out of this Support zone. It then retests the old Support (which is now a Resistance zone) and forms a downtrend.
+ When the price breaks out of the Resistance and goes up, the Resistance zone, after being penetrated, will become the Support zone as the price retests (the price retests the level before raising further).
A practical example of the changeover from Resistance to Support.
Resistance is formed when the price fails to cross the highest peak. On touching this Resistance the next time, the price successfully breaks through it. The price retests the old Resistance (which has become the Support zone) and then forms an uptrend.
The relationship between Trends and Resistance & Support
When prices break out and retest, a trend will form. Depending on the direction of the price breakout, it could be an uptrend or a downtrend.
The example below depicts the formation of a downtrend when the price continually breaks out of the Support levels, retests them, and then turns down.
Traders’ common behavior when facing the indicator:
+ Buy bottoms and sell tops: Buy when the price touches the Support. Sell when the price hits the Resistance.
+ Trade on breakout points: Buy when the price breaks out of the Resistance. Sell when the price breaks out of the Support.
How to trade Forex effectively using Resistance and Support
Based on the important properties that have just been analyzed above, there are 2 effective trading strategies using this indicator.
Notes: Below, I will guide you on how to trade Forex with it. However, these are only test transactions to get used to. You can only do this on a Demo account. Absolutely do not use it on a real account.
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Strategy 1: Trading by buying bottoms and selling top
With this trading strategy, you should prioritize opening trades in the strong Resistance and Support zones. It is very risky to trade if you choose weak Resistance and Support zones (where prices often break out of).
Open a BUY order when the price touches the Support as follows:
+ Entry Point: when the price touches the Support and rebounds.
+ Stop-Loss: at the lowest price level before rebounding.
+ Take-Profit: when the price touches old resistance levels that have been formed in the past.
Open a SELL order when the price touches the Resistance as follows:
+ Entry Point: when the price touches the Resistance and falls back.
+ Stop-Loss: at the highest price level before falling back.
+ Take-Profit: when the price touches old support levels that have been formed in the past.
Strategy 2: Trading on breakout and retest of the price
For this trading style, you need to wait for the price’s retest point after a breakout. Compared with strategy 1, trading by breakout points will be safer for your order. Trading sentiment will also be more comfortable.
Open a BUY order when the price breaks out of the Resistance as follows:
+ Entry Point: when the price retests and rebounds.
+ Stop-Loss: at the nearest Support zone to the price breakout point.
+ Take-Profit: when the price touches old resistance levels that have been formed in the past.
Open a SELL order when the price breaks out of the Support as follows:
+ Entry Point: when the price retests and falls back.
+ Stop-Loss: at the nearest Resistance zone to the price breakout point.
+ Take-Profit: when the price touches old support levels that have been formed in the past.
Using Support and Resistance in analysis and trading is one of the most basic skills you need to master. Hopefully, the article will help you understand the techniques of using this beautiful indicator when trading Forex.
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The post What Are Support And Resistance? How To Trade Forex Effectively appeared first on How To Trade Blog.
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