In the heady world of forex trading, support and resistance are two phrases bandied around readily and form the basis of many trading decisions. However, for any newcomer into the world of dealing currency, the terms can seem confusing and of no help whatsoever. Below are the tricks of the trade and everything a beginner needs to know on the subject.
The easiest way to look at support and resistance is by plotting a currency’s performance on a chart. Over a period of time, it will become obvious that a certain level is its baseline below which is doesn’t seem to drop. That level is known as the support – in other words the lowest point at which the market trades for the currency. At the other end of the scale, there will be a high point, a level which the currency does not seem to break through. This is known as the resistance level. Easy so far?
OK, this is where it can sometimes become a little bit confusing. When a currency continues to hit its support level, traders are likely to decide to sell, a move which devalues the currency further causing it to break through its support level. When this happens, the new support level becomes known as a resistance level. Likewise, when a resistance level is breached, it becomes the new support level.
However, sometimes resistance and support level breaches can be deceiving with investors merely dipping their toes in the water and the values quickly slip back within the expected band range.
The other factor to consider is timescales. Resistance and support levels will look very different when considering the market over a day, a week or even a month. The strongest levels are those which have stood the test of time and it is these levels which will be of most help to a trader trying to predict the market.
There are many different ways to measure support and resistance levels but one of the key facts to take on board, no matter what is used is that investors like neat figures. Therefore, levels of 00, 25 and 50 are often key indicators with 00 often being the most important.
Traders can, and often do, spend years developing a dealing strategy so it would be impossible to cover all aspects. However, every strategy incorporates the fundamentals of support and resistance and for this, forex information is absolutely vital as without this, a trader would be effectively doing no more than taking pot shots in the dark.
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