How to Trade Using Support and Resistance Levels on the Forex Market

If you’ve spent any time at all in the forex arena, you’ll no doubt have noticed how much attention traders pay to their candlestick charts as they diligently track every dip, jump and plateau in order to try and gauge the overall direction of travel.

Central to this practice is the concept of resistance and support levels, which are relied upon by analysts to judge just how far the market is likely to go in either direction before the (metaphorical) tide turns and the price of their chosen security begins to move the opposite way.

These are fundamental terms that form the basis of entire schools of analytical thought, so they’re pretty much mandatory learning for novice traders -so let’s start from the top; what do we mean when we talk of ‘support’ and ‘resistance’ lines in forex?

What Do Traders Mean by Support and Resistance Levels?

Simply put, a ‘resistance level’ is highest point a market movement reaches before losing positive momentum and pulling back; these are the upwards-facing peaks on your price chart, and quite literally signify the market forces resisting a push into a higher price territory (at least for the time being).

Conversely, the ‘support level’ is the lowest point the price reaches before it subsequently stops dropping and begins moving upwards again — they can be thought of as a metaphorical ‘brace’ that provide support to the price and stop it from falling any further, and are represented by the bottom points of the v-shaped movements on your chart.

These two levels are constantly being formed and refreshed as the forex market changes over time, with the general momentum of the market’s direction painting a wider upwards (bull market) or downwards (bear market) trajectory.

In between these ‘major’ resistance and support lines, it’s worth noting there are often sporadic ‘minor’ resistance and support levels that temporarily halt the price movement going in either direction; these can be seen as the small ‘zig-zagging’ lines added volatility to a market that’s heading in a general direction before a major support or resistance reverses the overall trajectory altogether (ie. changes a depreciating trend into an appreciating trend, or vice versa).

It’s also important to understand these points are not exact figures, and supports and resistances that appear to have been breached can sometimes turn out to have been mere tests that don’t affect the prevailing trends (observable in candlestick chart ‘shadows’ that extend beyond the line momentarily). The more often a boundary is tested without being broken, the ‘stronger’ this level is considered to be in analytical terms.

Further reading: https://tradingstrategyguides.com/support-and-resistance-strategy/

How Do You Know if a Support or Resistance Line Will Hold?

Here’s the tricky part: there are no hard and fast criteria as to what constitutes a support or resistance breakthrough; many consider the level to have been broken if the market can close beyond that figure at the end of the session, though this is not always the case. On occasion, for example, the closing price can simply be considered an extended ‘test’, whereby the market returns to the preceding level the next day!

Consequently, it’s often best not to put too much stock in exact numbers — rather, you should think of resistance and support boundaries as more generalised ‘zones’ of interest rather than rigid pip thresholds.

Indeed, while they’re an invaluable tool most of the time, candlestick charts can actually be misleading in this regard and plotting market movements on a line graph can actually provide more clarity. This is because they only pertain to closing prices — i.e. largely purposeful, bigger picture movements — factoring out extra intraday noise such as extreme knee-jerk highs and lows that can become distracting and paint a false picture of what’s likely to come next.

How Do You Identify Ascending and Descending Channels in Forex?

Generally speaking, a market movement where the chart’s candlesticks seems to be heading upwards — recording both higher highs and higher lows over time, often culminating in resistance levels being tested and/or broken — is what’s known as an ‘ascending channel’ in technical forex analysis, whilst the opposite (showing a downward trajectory with increasingly lower lows and lower highs) is referred to as a descending channel.

When a major resistance level is surpassed by the market, it’s possible for this benchmark to become the new support level as the price increase gains momentum — in fact, it’s not uncommon for the price point to ‘bounce’ off this new support line multiple times before it’s finally broken by downward pressure.

Additionally, once a resistance or support level has been broken, the strength of the follow-through movement tends to be proportional to the strength of the boundary it has just successfully passed through.

In other words, if a minor resistance is broken after just one or a few attempts, the ensuing appreciation is generally fairly substantial, whereas the market will typically run out of momentum (for the time being) not long after breaking a stubborn major resistance that has taken many tests to overcome.

Further reading: https://www.dailyfx.com/education/learn-technical-analysis/support-and-resistance-trading.html

How Could You Go About Planning Trades with Support and Resistance Levels?

There is of course no fool-proof method when it comes to profiting on forex, but the most straightforward way to base your trades around support and resistance levels is to buy/go long when the market looks to be approaching a support level — as the near-term market movement is likely to be upwards, so the price of the security will rise — whilst selling/shorting near resistance levels when the market is depreciating, as these statistically indicate further downward movement is in store.

In order to make doubly sure that they’ve assessed the situation correctly, many savvy speculators will wait for some form of confirmation that the market is still behaving as predicted before placing their trades.

For instance, long traders will often hold back slightly and wait for consolidation around the general support area (which shows the support is still being respected for now) then action their trade once the market begins to appreciate above the upper limit of the support area; the reverse principle applies for short sellers.

Furthermore, as ever, it’s vital to take steps to limit any losses should your predictions prove inaccurate, so placing a stop loss order a few pips below your predicted support when going long — and likewise above your predicted resistance when shorting — will safeguard you from blowing your account if your target boundary fails to hold.

At the other end of the success spectrum, it pays to have a target price in mind to make sure greed doesn’t get the best of you and cause you to miss your chance to cash out with a profit! A good rule of thumb here is for buyers to exit before the next identifiable major resistance level, while sellers should consider getting out before the market hits a strong support to avoid getting caught in a market reversal.

Further reading: https://www.babypips.com/learn/forex/trading-the-lines

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The content contained herein does not construe any form of advice and the user must not take this as such. We do not accept any liability for the direct or indirect usage of the content held in this article. We strongly advise that you obtain independent financial, legal and tax advice before proceeding with any currency or spot metals trades.