Support and Resistance are two fundamental concepts in forex trading that identify areas in the market where price action may reverse or bounce. They are based on the assumption that prices tend to move in trends and that previous price levels can influence future price movements.
Support Level:
A level below the current price where buying interest is strong enough to prevent further declines.
Price tends to bounce off support levels, indicating that there is demand for the currency at that price.
Resistance Level:
A level above the current price where selling interest is strong enough to prevent further increases.
Price tends to encounter resistance at these levels, indicating that there is supply for the currency at that price.
Characteristics of Support and Resistance:
Repeated Tests: Support and resistance levels are established through multiple price tests over time.
Consolidation: Price often consolidates around support and resistance levels before breaking through or reversing.
Psychological Factors: Support and resistance levels can be influenced by psychological factors, such as round numbers or previous highs and lows.
Market Conditions: The strength of support and resistance levels can vary depending on market conditions, such as economic news or geopolitical events.
Applications of Support and Resistance:
Identifying Trading Opportunities: Traders can use support and resistance levels to identify potential buy and sell zones where price action may reverse.
Managing Risk: Support and resistance levels can be used to set stop-loss orders to limit potential losses.
Confirmation of Trends: Breaking through a support or resistance level can provide confirmation of a trend continuation or reversal.
Note: Support and resistance levels are not always 100% accurate. They can break down occasionally, but they remain valuable tools for forex traders to analyze price action and make informed trading decisions.