How to trade Forex using support and resistance lines?
Determining support and resistance
Support is the price level at which a downtrend can be expected to stop due to concentration of demand or buying interest. When the price of an asset or a security falls, the demand for the stock increases, forming a support line. Meanwhile, resistance zones arise due to the interest from sellers when prices rise.
Once an area or "zone" of support or resistance has been identified, these price levels can serve as potential entry or exit points because when price reaches a support or resistance point, it will do one of two things - bounce back. from the support or resistance level, or break the price level and continue moving in its direction until it reaches the next support or resistance level.
The timing of some trades is based on the belief that support and resistance zones will not be breached. Whether the price is stopped by a support or resistance level, or whether it breaks out, traders can “place bets” on direction and can quickly determine if they are correct. If the price moves in the wrong direction, the position can be closed with a small loss. However, if the price is moving in the right direction, the move can be significant.
How to trade Forex using support and resistance lines?
Most experienced traders can share stories of how certain price levels prevent traders from pushing the price of an underlying asset in a certain direction. For example, suppose Jim held a position in a stock from March to November and expected the stock to rise.
Let's imagine that Jim notices that the price cannot rise above $ 39 several times over the course of several months, even though it is very close to rising above that level. In this case, traders would call the price level around $ 39 a resistance level. As you can see from the chart below, resistance levels are also considered a ceiling because these price levels represent the areas where the rally ends.
Support levels are the other side of the coin. Support refers to prices on a chart, which tend to act as a lower bound, preventing the price of an asset from going down. As you can see from the chart below, the ability to identify a support level can also coincide with a buying opportunity, because this is usually an area where market participants see value and start pushing prices up again.
