There are a few concepts in Forex trading which often cause confusion in a beginner’s mind. The idea of support-and resistance is one such concept. Very often, it seems that traders have their own idea of that. They measure these two elements with their respective ideas about them.
Basics of Forex Support-and-Resistance
The price movement follows an up-and-down path and creates a zig-zag pattern on a line chart. Along with its advancement, the price movement rises to a level and then falls to another level. The concept lies in the traveling path of the market.
The peak of a rising price movement before reversing is called a resistance level. This level indicates the high strength of sellers, and it is an unyielding level. Again, the bottom point of a falling price movement, the point from where it bounces back, is called a support or a hold up line. It indicates a buyer’s surplus.
The reverse or reversal refers to a falling trend. After getting the gist of that, a trader needs to know how to trade them to profit from both movements.
Like, they need to purchase when the price goes down during a bounce. They need to sell when the bounce is ongoing and the price moves towards the resistance.
Almost all the traders know how to trade a breakout. The best buying situation is when the price breaks through the unyielding line and goes further up. The best selling situation is when it breaks through that and goes further down.
Easy way to find the dynamic levels
You can easily find the dynamic support and resistance levels by using the 200 day SMA. But for that, you need to understand how the futures market works. Study the price action signals and look for the rejection at the 200 day SMA so that you can determine the exact buying and selling zones.
Recognizing a Support Level and a Resistance Level
In a given situation, these are two different points. What most traders struggle to recognize is a breakout. Sometimes the market only tests its line, which may appear like a sure breakout. Investors mostly misinterpret such signals only to discover their mistake later.
In a candlestick chart, such false breakouts are depicted as candlestick shadows. Though there is no solid strategy to mark a breakout for sure, many professionals have their own theories on this matter. It is worth mentioning that all those theories are invalid in real trading situations.
The best approach is to consider those as zones instead of a line or numbers. In such a case, a line chart will be most helpful for a trader than candlesticks. Because candlestick, by nature, shows more than just the price’s movement like highs and lows of the market. These highs and lows can give a trader a false signal. The experience of a trader will be like someone who has been disappointed.
So, while identifying those two or a breakout, investors should concentrate on the market’s intentional movement instead of its reflexes.
The characteristics and nature of those are opposite of each other. When the support acts like a floor to prevent a trend from falling beyond the record, the other one works as a roof. Both have their own way of helping or impeding market movement. This floor indicates a buying opportunity as the price is more likely to turn into an uptrend once it reaches the support line. On the contrary, the roof is more of a selling warning. The price seems to bounce-back once it reaches that level.
Some crucial aspects of these two market-defining characteristics need to be focused on. Like, once the price breaks through an unyielding roof, it becomes the new hold up line. The strength of these can be estimated by the number of times it gets tested. However, when a trend breaches the resistance and support level, its strength reflects the strength of the breached resistance or support level.