Support & Resistance In Forex Trading

The key concepts of support and resistance are undoubtedly among the most important and most followed aspects of both technical analysis and trading in general. Whether you are a technical trader, a fundamental trader, a combination of the two, or something else altogether, chances are that you follow support/resistance principles at least to some degree in your forex trading.

There are many different methods of denoting support and resistance levels. Among these different methods are: horizontal levels where price turned or made significant highs/lows in the past, angled trendlines and parallel trend channels, pivot points, Fibonacci levels, Gann studies, Andrew’s Pitchfork, Bollinger Bands, and moving averages, among many others.

Among these methods of pointing out support and resistance, simple horizontal lines are one of the most logical and reliable methods. This is due to the fact that much of the support/resistance phenomenon that we see on currency charts is derived from traders’ memories of specific price levels, and whether the traders consider these specific price levels to be relatively high or relatively low. This is partly what creates the buying and selling pressures at different levels. Also, support/resistance is somewhat of a self-fulfilling prophecy in that a critical mass of traders will often trade based upon previously visited levels where price turned before. Finally, and very importantly, large institutional orders are often placed in certain established price zones. When price action reaches those zones, substantial price action often results which moves price significantly according to support/resistance principles.

Trading with support and resistance entails looking for either respect or violation of price levels (or, more accurately, price zones). Respect comes in the form of bounces, while violation comes in the form of breaks. The difficult part of this is knowing when price is truly respecting or violating a support/resistance level, and if there is any follow-through to the price move. Along with solid risk management, these are the keys to trading effectively with support and resistance.

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