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What is support and resistance?

Discussion in 'Forex Beginner Q&A' started by Sayen Aylen, May 22, 2009.

  1. Sayen Aylen

    Sayen Aylen New Member

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    I have just started trading can anyone help me to explain that what is support and resistance levels? What is the use, I mean where we can apply them?
     
  2. prav

    prav Moderator
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    The concepts of support and resistance are undoubtedly two of the most highly discussed attributes of technical analysis and they are often regarded as a subject that is complex by those who are just learning to trade. This article will attempt to clarify the complexity surrounding these concepts by focusing on the basics of what traders need to know. You'll learn that these terms are used by traders to refer to price levels on charts that tend to act as barriers from preventing the price of an asset from getting pushed in a certain direction.

    Support and Resistance
    levels is one of the most commonly used technical analysis concepts in forex trading, so as a budding forex traders this is something we must know about. For something that is so common there seems to be a lot of confusion about support and resistance. That’s why we are going to run some articles to take you trough the learning process.

    Support and resistance as practical concepts is without doubt one of the most discussed tools in forex technical analysis and for those starting out as traders, can seem complex to understand. In this article we will try to give you an understanding of what forex traders mean by support and resistance and how they refer to price levels that act as barriers for the price to go beyond a certain level in both directions.
    Lets start by looking at the basics:

    [​IMG]

    Look at the simple chart above. As you can tell this is a bull market moving up. As the market moves it doesn’t move straight up or down but in these zig zag patterns as traders are testing the limits or taking profits. Thats why we look at the graph and see that the first point where the graph moved up but then pulled back. This temporary high is now what we call a ‘resistance level’. Now as the market moves down we refer to the lowest point before it moves up again as ’support’.

    These movements up and down, then up, then down are characteristic of a forex market with both an uptrend or a downtrend. Said in other words: The market can go up or down in general, but we will still see these variations over that trend. These peaks and lows of a general trend are ’support and resistance levels’ and are a natural thing brought on by the psychology of the traders as everyone tries to anticipate the future direction.

    This is the very basics of support and resistance and while it may seem easy to understand at first, there are actually many different methods and views on the subject.

    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

    Price patterns:
    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/
     
    #2 prav, May 22, 2009
    Last edited: May 22, 2009
  3. lancehibner

    lancehibner New Member

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    I think that support and resistance is the one of the most popular and widely used methods of technical analysis in Forex. If you plan to trade using support and resistance, don’t forget these important facts that when the support level is broken it becomes a resistance level, the vice versant is also correct. If the rate bounces off the support or resistance that level becomes stronger. The stronger support and resistance level is the more profit can be gained when it’s broken.
     
    #3 lancehibner, Jun 5, 2009
    Last edited by a moderator: Jun 5, 2009
  4. MechXTrader

    MechXTrader New Member

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    Prav - Great explanation of S&R Levels.

    From my experience this is one of the best ways of trading, in any market. Indicators, chart patterns and Candlesticks.
     
  5. forexboy

    forexboy New Member

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    Hello I am a newbie too and I am having trouble about determining breakout on those support and resistances because lately I encountered several of them
     
  6. alessio

    alessio New Member

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    Yes, very often its becomes really complicated to determine these lines.

    You need to know that support and resistance lines used in technical analysis are drawn connecting only important bottoms and tops.
     
  7. forexboy

    forexboy New Member

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    Most sites offering their support and resistance level seems to vary with one another.
     
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