Whatever trading strategy you are using, it is important to know where support and resistance levels are on your chart. In this guide, I will look at what support and resistance levels are and why it is imperative to be aware of them and mark them on your charts.
What is support and resistance in forex trading?
When the Forex market moves up and then starts to turn back down, the highest point that it has reached before the drop down is known as resistance. When the Forex market moves down and then starts to turn back up, the lowest point that it has reached before the rise is known as support.
Many traders believe that the more times a support or resistance level is reached but not broken, the stronger the level is. Some traders will wait for a level to be hit multiple times as confirmation that it is a strong level.
Usually the most obvious levels of support and resistance will be marked by many forex traders around the globe. This can mean that they are more reliable as these traders may place entries, stop losses and take profits around these levels. If a support level is breached, it can often act as a new resistance level whereas when a resistance level is breached, it can become a new level of support. The most signficant levels will tend to breakout with some force when they are breached as entries and exits from many traders are triggered.
How to draw support and resistance levels?
Both support and resistance can be marked with a simple horizontal line. Whilst you can use just one high or one low point for each level, it is common practice to try and mark levels where price has clearly bounced several times.
In addition to marking flat levels of support and resistance, you can also use trend lines to identify trading channels in uptrend and downtrends. An uptrend line is drawn along identifiable valleys, or support areas. A downtrend line is drawn along identifiable peaks, or resistance areas.
To create an ascending channel, you draw a line that is parallel and that is the same angle as an uptrend line, and then simply position the line to where it touches the most recent resistance level. With a descending channel, you just move the parallel line to where it touches the most recent support level.
It is worth considering that if you mark support and resistance levels on line charts, they will only be using the closing price, without the highs and lows that the candlestick chart shows.
It is also important to be aware of the chart time frame that you are marking the levels on. Whilst this will usually depend on your trading strategy (scalping, day trading or swing trading), what looks like support or resistance on a particular time frame may not be on another.
I like to check my levels on multiple time frames as it helps me to decide how significant the level is. Some traders will even plot support and resistance across multiple time frames so that they are aware of each level whatever time frame they are watching. I tend to find support and resistance on longer term time frames more reliable and easier to spot.
Support and resistance trading strategies
There is a plethora of different ways to trade support and resistance levels as they are whilst you can also incorporate them as part of an overall forex trading strategy. The first step is to market the support and resistance levels then decide how you will use them.
I personally would always look to confirm the levels with additional analysis such as candlestick patterns, technical indicators, sentiment analysis and fundamental analysis. Candlestick patterns can show price action around the levels whilst a technical indicator such as an oscillator can show potentially overbought or oversold areas around the levels.
Of course, there are no guarantees on how any forex trading strategy will perform and what will happen in the markets. Thus, it is imperative to ensure that you have a solid forex trading plan and are using a sensible risk that you feel comfortable with good money management in place.
Here are some of the ways the levels are commonly used by forex traders:
Trend trading is a forex trading strategy that attempts to take advantage by analyzing forex movement in a specific direction. Forex traders who trade with this strategy would look to enter a buy (long) position when they see a currency pair is trending up and they would look to sell (short) when they see that a currency pair is trending down. Trend traders would usually be using an indicator such as the moving average to try and identify trends.
Trend trading with support and resistance levels can help to identify the direction that a currency pair is moving and also potential entry points into the trend. One idea is to enter an obvious uptrend once price has bounced of support as this may be seen as a continuation of the trend. On the other hand, if price bounces off resistance in a down trend, this could be an indication that the market will continue heading south.
A countertrend trading strategy is when the trader will try to enter against the trend in anticipation that the market is turning around. When price turns around, it can mean the trend is coming to an end or that there is a reversal before a trend continuation.
Countertrend forex traders often depend on technical indicators and oscillators like the relative strength index while making their trade decisions. Knowing where the support and resistance levels are can be beneficial when trying to filter for countertrend trades as price will often bounce from these levels.
Range trading is a forex trading strategy where traders will look for a range bound market where price is bouncing between support and resistance within a price channel that they have marked on the chart with horizontal lines. They will then look to trade between the range until it is breached, buying near the price channels support and selling near the resistance.
Summary of trading forex support and resistance levels
Many professional traders use support and resistance levels as a key part of their trading strategy. They can be vital in spotting areas to enter/exit trades whilst they can also act as a good filter to determine the current market condition and when a currency pair is trending or ranging. The more a level is tested and not breached, the more prevalent it tends to be.
I believe it is imperative to be aware of support and resistance levels and have them marked on your charts. That being said, even if you were to pick the correct levels 100% of the time, you would still need a good trading plan, patience, discipline and money management to increase your chances of success long term.
If you would like to practice trading forex online with support and resistance strategies, you will need an account with a trading broker. You may wish to see my best forex brokers for some options that I have reviewed over the years.