Forex Trading Support and Resistance with Charts

Support and resistance are terms used in Forex trading to show the lowest and highest points that the price of a currency pair reaches as it fluctuates within a given period.

When the price falls, the lowest point it reaches before rising again is called Support.

As the price rises, the point it reaches before falling back again is called Resistance.

The figure below shows the support and resistance for EUR/USD using a line chart.

The support or resistance is broken when the price goes beyond it. Sometimes the support or resistance may appear broken, but in reality the market was just testing. You make a sell or buy order believing that the support or resistance has been broken, then oops! Testing.

So how do you know that support and resistance have truly been broken? No wizardry here. Just simple examination of the price trends with the help of a few lines.

Support and Resistance Horizontal Lines

First, you need to know that support and resistance are not real values but zones. These zones can be mapped by plotting one support with another or one resistance with another to get trend lines. However, do not plot minor points because they can be misleading. Some highs and lows are merely market reflexes rather than true breaking points. See how to plot support and resistance in the figure below.

Trend Lines

These are lines used to plot resistance and support to show the movement of prices. Upward trends join support points that are easily identifiable; while downward trend lines plot resistance points that can be easily identified. Sideways trend show a flat or horizontal movement of prices.

To draw a sideways trend, you join two major tops or bottoms of a horizontal trend of a Forex chart.

For upward and downward trends, you join major support and resistance points respectively.

Just that simple… Forex trading is fun, you do not have to do magic. Just identify those major points and join them, then you have a trend. In the figure above, there is a sharp downward trend, followed by a short horizontal trend, and finally a long gradual upward trend.

Channels

You can manipulate trend lines by adding parallel lines to form channels. By drawing a downward trend line parallel to the initial one you form a descending channel. Moreover, you can draw another upward trend line parallel to the initial one to form an ascending channel as shown below.

NOTE:

  • Do not force the trend lines to follow your guts or to fit the market. If the lines do not fit naturally, then you have an invalid trend line, and using it to base your Forex trade will be detrimental to your investment.
  • Two tops and bottoms form a trend line, but THREE confirm the trend line.
  • A STEEP trend line is not reliable in making Forex trading because it is most likely to break.
  • Support and resistance are not cast on stone. Market prices can sometimes pass through a support level, and that support becomes resistance. And prices may also go past a resistance level, and that resistance becomes support.
  • The technical analysis lines are stronger if they are tested more times. In the figure above, the upward trend line is reliable because it is less steep and support and resistance have been tested multiple times. In this case, the best decision is to BUY…..

However, Forex trading is significantly risky. You may decide to buy and suddenly news come in saying that the U.S. President has announced a major trade deal with China. So you just decide to liquidate your trade and go brew some coffee to relax your mind before making another trade.

Later we will see how to use the fundamental approach to confirm the technical analysis.

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