Support and Resistance in Forex Technical Analysis

Resistance and support are the most widely used technical concepts in the trading process. Oddly enough, everyone has their own way of measuring support and resistance.

Let’s take a look at the basic form first:

When the market moves higher and then retraces, the highest point is formed. After the exchange rate retraces, the highest point becomes a resistance level.

As the market moves higher again, the price's previous lows now act as support. From this point of view, price resistance and support are constantly changing with the market trend.

Description of resistance and support

One thing to remember is that resistance and support are not specific numbers.

Many times you will see resistance and support levels appear to be broken, only to later find out that the market is simply testing said prices.

It is usually the shadow portion of a candle pattern that "tests" resistance and support levels.

Notice how the shadow portion of the candlestick tests the 1.4700 support level. At those times, it looks like the pair is about to break below support. But it turns out the market is just testing this price point.

So, how do we really know when a support or resistance level has been breached?

There is no clear answer to this question. Some argue that if the market closes above this level, a resistance or support level will be broken. However, you will find that this is not always the case.

Let’s look at the same example as above and you will clearly see what happens when price closes below the 1.4700 support.

In this case, the exchange rate closed below the 1.4700 support level, but then rose above this line again.

If you believe that when the exchange rate falls below 1.4700, it is a real breakthrough and sell, then you will suffer heavy losses!

Looking at this chart now, you will clearly see that the 1.4700 support has not actually been broken, it is still intact and stronger.

To help you filter out these false breakouts, you should think of support and resistance more as a "range" than as specific values.

One way you can find support or resistance areas is to plot support or resistance on a line chart rather than on a candlestick chart. The reason is that a line chart only shows the closing price, while a candlestick chart adds additional highs and lows to the graph.

These highs and lows can mislead traders because many times, the formation of these highs and lows is just a "knee-jerk reaction" in the market.

When describing support and resistance, you don't want to get market reflex information. You just have to map out the market's potential direction of movement instantly.

The peak or trough formed in the price constitutes the resistance or support line of the price.

Other interesting stuff about support and resistance

1. When the price breaks through the resistance level, the resistance level may become a potential support level.

2. The more the price tests resistance or support levels rather than breaks through, the stronger the resistance or support area.

3. When a certain resistance or support level is broken, the trend of the breakthrough market depends on the strength of the resistance or support level before.

After some practice, you will be able to easily draw potential resistance or support lines. In the next lesson, we will teach you how to trade trendline resistance or support.

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