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Posted on May 24, 2019 at 02:17 PM
Support and resistance is like a tug of war game between an elephant and a hippopotamus where both of them are pulling a rope over a mud puddle. If the elephant's pull is tighter than the hippo's, the hippo loses and ends up in the muddle vice versa. This is the same way it is in the Forex market.
One of the most crucial skills in Forex trading is the process of finding support and resistance levels.
Identifying these levels makes it easy to determine where the price of a Forex pair or commodity is likely to experience a reversal.
In the Forex market, the bulls and bears are fighting for dominance in the Forex market.
Some of them believe that the Forex pair will go up and some of them believe that it will go down. Therefore, a clash ensues between buyers and sellers.
The ones who prevail will push the Forex pair in their respective direction.
Support is where the price tends to stop falling, and resistance is where the price tends to stop rising. Yet, it is not enough to make trading decisions based on this vague explanation as it will only lead to a depleted account.
Supports are the levels which are beneath the current price, while resistances are the levels above. Furthermore, when price goes down through a support level and breaks it, this level becomes a new resistance and vice versa.
In other words, when breaking the level in a bearish direction, price relocates under that level and the old support levels now becomes a new area of resistance.
Support and resistance are highlighted with horizontal or angled lines, called trendlines.
To really understand the concept of support and resistance, you must really grasp the understanding of trends, channels and range.
A trend is a tendency for prices to move in a particular direction (Up or Down) over a period. A currency pair is trending when it is increasing or decreasing for a longer period of time.
There are several types of trend tendencies in Forex such as range, uptrend, downtrend etc. The commonest trend tendencies of great impact to the trade account of a Forex trader is the bullish (Uptrend) and bearish (downtrend) trends.
To identify an uptrend – the trendlines will be a combination of higher highs and higher lows.
You can see here on the chart that the trend is a definite uptrend. The black arrows show that the lows for each period are higher than the previous lows. The red arrows show that the highs for each period of time are higher than the previous period.
To identify a downtrend, you will see a pattern of lower highs and lower lows from the market’s swing points.
Go ahead and identify these trends on your chart and leave a comment on how it went. Next, we'll look out trendlines and how to draw them before we round off with identifying support and resistance on your chart.
Have you got any question? Do leave a comment in the comment section below and we'll be sure to respond to it swiftly.