Levels of support and resistance is one of the basic concepts in the Forex. They allow to better understand the situation on the market and find the most favorable opening and closing moments of the commercial transactions. The most trading strategies are based on these levels, so, it is extremely important for everyone, who is going to trade in the Forex, to know how to identify support and resistance.
What is the support level
Support in Forex is a price level at which the buyers, preventing price from dropping lower, gathered. Before this level, the sellers, who sell an asset, which in their opinion, is overrated, were at the market. However, reaching the level of support they met resistance from the buyers. At this point, the market established a temporary balance of forces.
Reaching the support level, price will likely turn around and begin to rise. The support level indicates the area of the prices at which it is believed that further price reductions will not be, because the market has a large number of buyers willing to purchase this asset.
What is the resistance level
Resistance is a level at which sellers gathered together, not allowing price to rise above. Reaching to the resistance level there is a high probability that price will turn around and begin to decline. The resistance level shows the price zone at which, in the opinion of most traders, the price will no rise more, because in the market there are a lot of offers on this asset.
In fact, significant levels of support and resistance in the Forex market show areas in which the price, with a high probability, can change its motion direction. At these levels there is a reassessment of market conditions and often the balance of buyers’ and sellers’ power changes.
If the majority of traders decide that the market is overbought, the price breaks through the support level and will be reduced, until it stops forming the next support level. Or if the majority of traders decide that the market is oversold, price will reflect from the support level and start to grow. The situation with resistance is the same, only reversed.
Breakouts of support and resistance levels
Most often, reaching the support or resistance level, the price stops and turn around. However, there are times when the price passes the level and moves on. If the resistance level was broken, it becomes a support level, and if a broken support level, it becomes resistance level.
There are true and false breakouts. After a true break-through trend continues to increase and become stronger. When the break is false, the price through a short time is unfolding. Therefore, in order to enter the market properly, you must be able to distinguish between them.
To determine what a break it was, you can through analysis of market volumes. If breakout occurs on high volume, it is likely that the breakout is true. And if the volumes are insignificant, the breakout is false and soon the price will return to its previous level and will unfold in the opposite direction.
It should be noted, that after the breakout price may stop at some time. This is due to the fact that traders are trying to understand, this break was true or false. In such moments, even at large scale, the price can roll away from the retracement levels if the majority of market participants deem the price unfair. Therefore, you need to be very careful before committing transactions. It’s better to wait for breakout confirmation from indicators’ signals.
The support and resistance levels in Forex are formed at any time intervals, but special importance should be given to those of them that are found on the larger time frames.