Forex School – 6th Lesson
Support and Resistance – Introduction
The market movements are determined by the demand and supply. The understanding of the trend analysis and support/resistance levels is essential to make profitable strategies on the forex market. The entry points have to be appointed in all cases on the basis of the trends and support/resistance levels. The signal of a moving average or other indicators is never an entry signal. These can aid the decision of the trader, but in every case the market entry happens close to a technical level, taking into account the trend.
The support and resistance are maybe the most mentioned expressions in technical analyzes. The support is a major bottom or a local bottom and the resistance is a major top or a local top. On the larger time frame we examine the technical levels, the more important. The support/resistance levels, which are formed on the W1 and D1 Charts are strong while those support and resistance levels which are formed on the M1 and M5 Charts are weak.
The support is that price level, which stops the falling of the price of an instrument. At this point instead of the sellers the buyers start to control the market. The more times a support level stops the price falling on a given point, the more important.
The resistance is that price level, which stops the rising of the price of an instrument. At this point instead of the buyers the sellers start to control the market. The more times a resistance level stops the price rising on a given point, the more important.
Support and resistance zones
Supports and resistances usually cannot be connected to a certain point. It’s more common that so-called support zones and resistance zones are formed on the market. It’s important to understand the logic of the support/resistance levels, because the market is moving between technical levels. The breakthrough of these technical levels opens the way upwards and downwards. In all cases, these are horizontal levels, so all the participants of the market see them similarly. Because of 1-1 shadow, a zone can be a little bit up or down on the charts of those traders who are trading in different parts of the world, but usually the differences are minimal. It’s important to the traders to see the same as the analysts of New York and London. This security is mainly given by the horizontal lines and zones which are drawn on the chart.
The breakthrough of technical level changes the relationship of the market participants to the given support/resistance levels. If a technical level breaks, the market participants can believe that the given level doesn’t function, that’s why it is often the entry point. When the breakthrough happened, then support will be resistance and resistance will be support. That technical level, which changes role is much stronger. The attack of the support/resistance levels is usually unsuccesful at first. When the breakthrough occurs, then it happens usually for the 2nd, 3rd or 4th time.
The breakthrough of support is usually the buying singal and the breakthroug of resistance is usually the selling signal. If the price breaks a technical level, then it is often followed by a greater price movement. Eg.: if the price break through a significant resistance, then very often the sellers disappear from the market almost completely. As a result, the price is free to rise sharply.