FOREX SUPPORT AND RESISTANCE TRADING: Questions and Answers for beginners
I heard about support and resistance. How to know where are them on chart, and how to effectively use it in trading?
Support and resistance trading is considered to be one of the most effective ways of Forex trading since it is based on the primary source of information -market price itself.
The basic understanding of support/resistance trading could be described as follows:
Once price reaches certain level at which some market reaction (price stop, price reversal etc) was seen in the past, it tends to produce certain reaction again. If traders are able to correctly anticipate this reaction, they will be able to benefit from market activity when price reaches support and resistance levels.
Support level means that upon reaching certain price the market is expected to find a new push from Buyers, who will try to drive price up.
Resistance level means that upon approaching it from below the price is expected to stop (temporarily or permanently) forced by Sellers' pressure to move back lower again.
How to spot support and resistance levels on the chart?
Let's first of all name several most commonly used methods and studies that help to identify support and resistance areas:
- price patterns
- trend lines
- moving averages
- pivot points
- fibonacci levels
If you look at charts, you'll find that price moves in waves. The points where price stops and reverses, creating a wave is a natural support or resistance level. (Support - for all price activity which happens above the mentioned level, resistance - for all activity happening below that level).
Famous price patterns traders watch for are: double top/bottom, triple top/bottom, head and shoulders. You may google those terms to find out about specific price patterns and the ways to trade them.
Trend lines - are natural ways to determine the intensity of a trending market and find the slope it travels with either up or down.
Trend line represents support/resistance level as it extends in the future.
Here is a good explanation on the net about the behavior of trend line's support/resistance at http://www.trendlinebook.com/?page=3
Moving averages - certain moving averages are believed to have an impact on the market price when it reaches or trades near them. To such Moving averages belong EMA 200, EMA 100, EMA 50 and EMA 20.
Pivot points - one of the fundamental ways to look for important support/resistance points during the trading session.
Pivot points is a separate study, which calculates price support/resistance points based on previous period activity.
More information about pivot points trading can be found at the ebook from the same series: http://www.fxpivot-points.com/
Fibonacci levels - another famous study with a goal to identify price turning points. There are many resources about Fibonacci trading available on the net.
How to effectively use support/resistance trading?
The key point is to identify the most valuable support / resistance levels for every Forex chart you traded. There is probably no special recipe on how to do that, the key is to learn and understand at least 5 basic studies mentioned above and then look for certain patterns and clues on the chart.
The most important and at the same time simple rule is to not make things complicated. Everything a trader sees on the chart should be interpreted at a glance without any hidden meanings. Some traders even base their trading purely on the price charts without a help of any additional indicators. They use trend lines and price waves to make decisions about price future behavior.
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