Forex Support and Resistance

In the world of forex, support and resistance are concepts that are vital to your understanding and to your success. They are tools we use to study the forex charts, which in turn are the basis of technical analysis.

So what are support and resistance in forex?

Simply put:

• support is a level that exists below the current price, acting as a barrier to the price falling below that level
• resistance is a level that exists above the current price, acting as a barrier to the price rising above that level.

However, that is a very simple explanation of a concept that isn't really simple, and there's much more to forex support and resistance than that. You need to dig a bit further and understand support and resistance in forex in order to successfully use them as a part of your forex trading strategy.

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What causes support and resistance?

If you look at a forex chart over time, you will be able to draw a horizontal line across the same bottom points that occur over and over. That would be the support level, and after each time it occurs you'll see the prices begin to rise again. The support level stopped prices from falling further. This level may historically have been a point when lots of traders entered trades, which of course caused the price to rise once again.

Conversely, you can draw a horizontal line across the top points that occur repeatedly. That means the currency prices have often reached that point but never climbed higher, making this the resistance level. For whatever reason, traders have historically begun to sell at this point, driving the price down.

Why are support and resistance levels important?

In forex trading, you must keep your eye on support and resistance levels because they are one indicator that prices are about to reverse. They can, therefore, be the start of a forex trading signal.

But notice I said they are one indicator. There are other factors in trading decisions and it would be unwise to rely on support and resistance alone.

But if the chart shows the currency you are watching is reaching the support level, it may be time to consider entering a new trade in time for the upturn in prices.

If the price is approaching the resistance level in a currency you are in, it might be time to take your profits and get out before the downturn comes.

Using support and resistance for stop loss orders

If you are using support and resistance indicators to set your stops, you should place your stops slightly below support or above resistance levels. That means your stop order won't be activated until prices actually breach the support or resistance levels. Otherwise, you run the risk of having a stop order take you out of a profitable trade prematurely.

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