Support and resistance levels are essential to review in the forex trading field. You can use these levels to identify how currency pairs can change in value and when the correct times are for investing in them. You must also review how these levels can change after a while and what you can expect from each one.
Support and resistance levels aren’t lines, but they’re trends to monitor when trading. You’ll notice when trading forex that a currency pair might go up and down, but it won’t be as likely to get outside of a specific range. You’ll notice that when the price goes high enough, the demand isn’t that prominent. But when the price drops low, the demand gets higher.
Let’s start by looking at the support level. The support level occurs when there’s a downtrend on a pair, but it stops because people are more interested in the investment. They want to buy the trading pair, thus producing a spike in demand. The price will not get any lower, producing a trading floor in the process.
The resistant level is the opposite, as it is part of the uptrend when traders start to sell their currencies. People are more likely to sell at this top point, keeping the price from going beyond its ceiling.
A good way to spot the support and resistance involves looking at how the prices of something range during a time. You may notice over a few hours, days, or weeks that the price stays within a certain range, with that price rarely leaving either direction. These levels will appear on the spots where the price isn’t changing as much.
The best way to trade with support and resistance levels is to review when you enter or exit a trade. You’ll notice one of two things when the price reaches one of these two levels. As it tests the level, the price will return to its regular range, or it will break through. It will eventually reach a new support or resistance level after it breaks through well enough.
These two levels can change after a while as they move up and down based on the currency’s trend and general price volatility. Traders often base their trading strategies on how these levels won’t change, but doing so would be a folly. You’ll have to prepare for the potential for support and resistance levels to change and adjust after a while.
Traders use these spots on a trend to plan their entry and exit positions. A trader can place a bet on how the trend will keep moving in one direction. That investor will soon learn if the move is correct based on the shifting that occurs. The person can close the position if it is incorrect, attaining a minor loss. But the profit that comes if the investor is right about one’s project could be significant.
Many trading platforms will include indicators that help you see when a currency pair reaches its support and resistance levels. You can use a visual platform to see how the prices of these currencies are changing and in what directions you will find. The design can also show how well these prices can shift during the investment process.
The worst thing you could do when investing in forex is to assume that the support and resistance levels are flat lines. You can see these levels as areas instead. An area shows the many places where the trend may land. Instead of worrying about whether a price goes beyond a line, you can watch how the price manages the zone. It provides a more accurate look at where the value of something goes.
These zones will keep you from worrying about currency pairs overshooting or undershooting. Overshooting can occur when the price goes over a resistance level bar. You would think that the price will keep going up before it reaches a new level, but the price would potentially go back to its range. You’ll be misled into thinking the value will change if you stick with a line instead of a zone where the price could land in one of many spots.
On the other side, you might experience undershooting. Undershooting is the opposite effect, as the price drops to the lower line but bounces up again.
The reason why many overshoots and undershoots happen is some traders might try to get in on a trend because they don’t want to miss out. Others might want to find the best prices for a trade.
Fear-of-missing-out or FOMO traders will enter the field right before an undershoot happens. They want to buy in when the price goes down to the support level. The market will eventually reverse if enough FOMO traders get in, as the value will keep getting too low. Many traders will want to get a profit on the deal, so they’ll enter in before they miss out on a low price.
Cheap traders can also appear during undershoots. These low-value traders will place their orders when the currency reaches its support level, hoping to rise in value.
The greatest problem with relying on these features as lines come from how you might feel that your trade isn’t working out if a currency goes past one of those lines. Even if it surpasses a line for one moment, it will still be tough to note. You may also begin thinking that the currency will move in a new direction and that its old resistance and support levels are no longer valid. But it only takes a few moments for the currency to get back within its normal range.
Watch for the support and resistance levels as areas instead of lines, as these traders can influence how the currencies work. Focusing on something as rigid as one line may cause you to think too much about how the value of something will change.
Now that you see how support and resistance levels work, the next point is to see how you can find these levels. For example, you might want to enter the EUR/USD pair. You will see the price keeps getting close to 1.635, but it never goes over that total. 1.635 can work as a resistance level. You could create a resistance area showing how high the currency could move. There’s a potential the currency could go over 1.635, but it won’t go too far above.
The same works for the support level you will find at the bottom. You might figure the price keeps getting near 1.465, but it never goes below that value. So you can create a support area around there, believing that EUR/USD will stay between 1.465 and 1.635. While the pair could go slightly outside that range, it might not break out.
But that resistance and support areas won’t last forever. The levels will be tested on occasion, eventually becoming weak to where it won’t stay at a certain price level. While you can use these areas to dictate when you should buy or sell a currency pair, you should never expect those areas to stay strong for a while. You can look at how the currency works around these limits to see whether it could rise or fall after a time.
The challenge of finding these levels entails more than looking at a chart. You can also use a formula to find these levels and review how the market sentiment is working. It may help you see if the market is bullish or bearish on a currency pair.
You can review a trend by looking at the pivot point for a currency and the three SR levels. These entail a look at the high and low totals for a currency during a specific range and the closing value at the end of that range.
The pivot point is a measure of the overall trend for a currency. You can use the high and low totals on a trend to see where it is moving. You could set the timeframe for the pivot point as far as you wish, provided it produces a reasonable range. The point helps you determine if the currency you want to support is going in one direction or if you should go elsewhere.
Here are some formulas you can use for trades:
Pivot Point (PP) = (High + Low + Close)/3
First Resistance Level (R1) = (PP x 2) – Low
First Support Level (S1) = (PP x 2) – High
Second Resistance Level (R2) = PP + (High + Low)
Second Support Level (S2) = PP – (High + Low)
Third Resistance Level (R3) = High + 2(PP – Low)
Third Support Level = Low – 2(High – PP)
These are useful calculations, although some charting programs can help you automatically find these totals. Be sure when looking at your trades that you stick with easy ones you can follow. A program can also help you choose a suitable closing time for each range to help you accurately measure what’s happening at any point.
You can use many trading strategies when handling support and resistance levels. The Bollinger bands and swing trading strategies use these levels, for example. But there are two trading strategies that are often more effective:
The bounce strategy entails trading after a bounce. Instead of trading at an SR level and waiting for the currency to go back within its range, you’ll watch for the price to bounce off of its support level before entering the market. The support line isn’t always going to hold, as the price could go further down. You won’t get the best price at this point, although trading on the bounce helps you go a little further.
A break occurs when a currency breaks its resistance level. You can trade based on breaks, but you should look at either an aggressive or conservative approach for the effort.
An aggressive plan for break trading involves buying or selling after the breakout. You can watch for how the prices of something will keep breaking out in one direction, confirming that the change is not a false breakout.
A conservative approach goes in the opposite direction. In this case, you’re closing a position on the opposite end of the trade. It works better than if you tried going long on a currency pair only for the pair to break, and you eventually reach a losing position. You can close a long trade near the breakeven point and short it by the same total, reducing your overall risk. There’s a potential for a new resistance level to build if enough traders get out of a position after the old support level is broken. You could wait for the prices to bounce back from the break and then enter at that point, as the risk of a trade dropping further in value won’t be as strong.
Support and resistance levels are useful for long-term trades, but they can work for day trading too. The goal is to find the proper SR levels in your deals. A visual review of a chart can help you see how a pair changes in value over a few hours, giving you an idea of what key levels are in the trade. But you should also watch for event levels during that time period. Some event levels can cause dramatic changes in how a currency trades.
Near-term levels can also work here. These levels can appear on a fifteen-minute chart and show the levels close to your currency price.
After finding all the levels, you can complete your day trade. All the levels you find should confirm that a price is moving in one direction. They can also show how strong or weak the resistance and support levels are.
Don’t forget about the positions of the candlesticks. The candlesticks can show how much activity is going on with the trade. It can show the sentiment of the market, whether it involves a dramatic shift in value or a sense of indecision in the trade.
Support and resistance bands are essential to review for your forex trading needs. Be sure when trading on the market that you know how these bands work and that you see what to expect in the field.
Make sure you’re also cautious when entering the field. Avoid placing more than 1 or 2 percent of your account on a trade.
Be ready to complete enough reviews of the market to see where a currency pair is moving. You can use a pivot point to help you dictate where you should be going with your investment, for example. But anything you use should be planned well to create a solution that fits your work needs and that you understand whatever might work at any moment.
