People always say to just position your trade based on the future market movement and see it run at profit.
However, it’s definitely easier said than done. There’s no crystal ball that tells you the future. Considering the inherently complex market, there are endless factors as to why it moves.
Don’t fret, because there will be tools that would help you identify the potential direction that the asset price will move. Support and resistance levels are probably the most popular indicator of potential price movement. And the reason was clear and very valid.
This TRU Insight walks you through support and resistance, the foundational technical analysis concept that every forex trader should know before entering the market. Read on and start mastering forex trading with support and resistance.
The Importance of Support and Resistance in Forex Trading
Support and resistance are two integral analysis tools used to make sense of the overwhelming financial market.
Both of these tools provide us with insights on the market zones where the asset has difficulty trading beyond. It’s the most beginner-friendly indicator as it’s easy to locate and straightforward to interpret.
Now, let’s dissect support and resistance from each other and analyze the value they each provide to traders.
Related: TradersUnited – What Are Support and Resistance Levels in Forex?
What Is Support?
When you think of support, you think of a thing that prevents something from crashing or falling. And interestingly, that can be applied either emotionally or physically.
But did you know that this concept of support can also be applied in the forex market?
Support in online trading refers to the market level at which the asset price has difficulty trading lower.
In trading terms, support level represents the trading area at which a lot of traders purchase the asset to push the price back up. This influx of buyers amidst the downturn (selling pressure) prevents the price from further dipping—acting as the support that keeps the price from further crashing.
Fun fact: you can think of support as the floor and the price as the ball. Unless enough force (selling pressure) is injected, the ball (price) will continue to bounce.
What Is Resistance?
Support barricades the price from dipping, right? Resistance, on the other hand, keeps it from rallying further.
Imagine it as if the market is resisting the price from growing further.
In trading terms, the resistance level represents the market area in which the buyers have difficulty pushing the forex price further up. The influx of sellers, whether with market or limit orders, makes the market resists on trading beyond the resistance level.
Fun fact: you can think of the resistance level as the ceiling that prevents the balloon (price) from flying towards the sky (above the resistance level). Unless the ceiling (selling pressure) is faulty, the ballon will stay underneath the ceiling.
Trendlines and Minor Support and Resistance Levels
Before you can spot or draw support and resistance onto your chart, you need to be familiar with trendlines. Also, you must know that support and resistance levels are not created equal—especially if you’re clueless with different timeframes when trading.
Let’s discuss the importance of trendlines when analyzing support and resistance levels and the key factors you should know to identify whether you’re looking at a major or minor support or resistance level.
Trendlines
Trendlines are the most common chart drawing out there. Without a familiarity with trendlines, a trader wouldn’t be able to chart the market, spot patterns, and identify market.
Basically, trendlines are connected pivot points.
Upper trendlines connect all higher highs and lower highs of the market swing. Ultimately, drawing the upper trendline forms the resistance level of the asset.
Meanwhile, a lower trendline is a line drawn by connecting the lower lows and higher lows of market swing. A lower trendline reveals the support level of the market.
Note: Yes, support and resistance levels can be found in a slope. A sloping S/R level is often found in a volatile and active market.
Minor Support and Resistance Levels
Again, support and resistance levels are not created equal. This is an important fact you need to keep in mind when your trading strategy centers around support and resistance levels.
But really, how do they differ from the typical support and resistance levels discussed in all online sources?
Well, you need to know that these levels are like Matryoshka dolls, also known as stacking dolls. Why?
It’s because there are more support and resistance levels within support and resistance. Those S/R levels found inside of a particular S/R levels are called the minors.
Minor support and resistance levels typically form on short-term timeframes. These levels are extremely sensitive to price changes. Thus, minor support and resistance trading strategies are only profitable for traders trying to exploit short-term price movements.
Long-term traders, like swing traders or position traders, should never base their strategies on these levels as these don’t last long.
Frequently Asked Questions
Do Support and Resistance Really Work?
The support and resistance (S/R) indicator are arguably the most-used trading indicator out there. This leading indicator provides insights into the potential movement of the asset price based on its historical market movement.
However, remember that the forex market is inherently complex as it moves due to various factors. The S/R indicator works best if it’s used in conjunction with other technical indicators and fundamental analysis.
How to Install Support and Resistance Indicator in MT4?
Sadly, MT4 doesn’t have a built-in support and resistance indicator into your platform.
However, you can easily install or plug in one by yourself. Simply download your S/R indicator file, open your MT4 platform, locate Open Data Folder under the File tab, and copy and paste the indicator file into the MQL4 folder.
Read more: 5 Best Brokers for MT4 (MetaTrader 4) in South Africa
What’s the Best Support and Resistance Trading Strategy?
The most common support and resistance trading strategy involves buying at support and selling at resistance.
Conservative traders buy once the price retested the S/R levels to ensure the accuracy of the signal.
