Topics of this course:
Identifying support and resistance levels
– Bounces and breaks
Specific levels to watch out for
Two common terms you’ll come across in Forex – especially technical analysis – are “support” and “resistance” levels. In this lesson, you’ll cover what these terms really mean and how to apply them to transactions.
Support & Resistance
Support levels are found below an instrument’s current price and tend to be where falling prices find a support base.
Price is more likely to “rise” from this level rather than “fall”.
An instrument has a resistance level above its current price and acts as a ceiling for prices as it rises. Resistance levels, which are the opposite of a support level, mean that the price is more likely to bounce back from that level rather than break.
Traders should pay more attention to recent support and resistance levels for two reasons.
Since the price can make sudden returns from support and resistance levels, attention should be paid to support and resistance levels when opening a new trade.
If you are already in a winning trade, you may want to consider taking profits once the price gets to the level in question.
Identifying Support and Resistance
There are several technical analysis indicators and tools that can be helpful in identifying support and resistance levels, including:
-Previous Upper and Lower levels
-Moving Averages -Trendlines
The chart below for Gold/USD (XAUUSD) shows support and resistance levels using Trend Lines drawn manually using the built-in MT4 drawing tools.
When support/resistance levels break, a breakout or bounce typically occurs until another support or resistance level is found.
A bounce is when the price of an instrument returns from what is defined as resistance or support.
A break of support or resistance is an important moment for trades, as it leads to the establishment of a new trend as more and more traders take positions on the new price action.
Additionally, once a support or resistance level is broken, it may become a new support or resistance level in the future.
It should be noted that experienced traders are typically wary when the price reaches the “full number”. Additionally, other levels can create psychological barriers where the market as a whole believes that any breach of that price will be overvalued or undervalued.
This chart from the EURUSD pair shows both an integer psychological barrier and another example of another important psychological resistance level:
As we can see from the chart above, the psychological level has been tested and eventually breached. The price rallied to the full number (1.10000) and then declined significantly shortly after this level was broken. The price then repeatedly returned to the previous psychological level and bounced before finally breaking out.