Forex Support and Resistance
The most commonly used concept in Forex Trading!
When the Forex market moves up and then pulls back, the highest point reached before it pulled back is now resistance. As the market continues up again, the lowest point reached before it started back is now support.
Identifying support and resistance areas
One thing to keep in mind is that support and resistance levels are not exact numbers, it’s a price zone. Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it leaving wicks and bouncing of the area/price zone.
There are two major rules to take into consideration when plotting support and resistance zones:
- Body bounces are more important than wick bounces.
- Recent data is always more important. Always.
To plot support and resistance zones, first you need to identify bounces on your chart. Ideally you will want several bounces that line up nicely. You don’t want reflexes of the market, you only want to plot its intentional movements.
Secondly, draw a horizontal line between them and join them.
It is really that simple. You look for strong bounces and place lines there.
They don’t have to be perfect bounces of the line. like we said earlier, these levels may appear broken but its just the market testing the whole price area/zone.
Other key points to note about support and resistance:
- When the price passes through resistance, that resistance could potentially become support.
- The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
- When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.
Trend lines
Trend lines are drawn on your chart as a form of technical analysis that help predict the general direction of price. They can also help to spot reversals.
There are only two types: Bullish (uptrend) and Bearish (downtrend)
Bearish Trend Line: —
Its formed by connecting two or more points called Lower Highs (LH). Rule of thumb is, the second Lower high point must be lower than the first lower high.
Bullish Trend Line: —
Just like a bearish trend line it’s formed by connecting two or more points. In a bullish trend, we call these points, Higher Lows (HL). The Second Higher low point must be higher than the first higher low.
From the word “Trend” We figure that we can only have trend lines when the market is trending. If it’s not trending and it moving sideways, we call that a Ranging Market. When the market trends, it moves inform of waves, (up and down) creating Higher highs (HH) & Higher Lows (HL) in an uptrend; and In a downtrend it creates Lower Lows (LL) & Lower Highs (LH). We will discuss this further in an article about market structure.
Even though you can place a trend line based on two HL or LH points, the trend line remains unconfirmed until it is hit a third time.
Once a trend line has been placed and it encounters a third bounce, it becomes active. Now the price should find support or resistance at your trend line. It should struggle to break through the line. If the price does break the line it usually means the trend is over.
Trend lines can be placed on all time frames but they are more effective on longer time frames. Also, the longer a trend line is active, the stronger it gets!
Using Trend lines
Trend lines have a lot of uses but the main ones are trend line bounces and trend line breaks. We will go over how using trend lines correctly can give you great advantages with your trading.
This trend line has 3 bounces so it is active. Now that price is approaching the trend line again, what will happen? Well, the trend line will either continue to hold or it will break. Let’s take a look at what happened this time around.
Wow — it broke and climbed over 200 pips!
This trend line has 3 points. On the fourth, the trend line tried to act as resistance. If it had succeeded, price would have reversed and continued down. However, the bullish movement was too strong. That means that the overall bearish trend is over and a bullish trend has begun.
Now let’s take a look at a trend line bounce.
Once again, this trend line has had 3 bounces and is now active. As you can see in the image, the price is approaching the line for a fourth time. Price will either break the trend line or bounce away it. This time it bounced.
Look at that — it bounced and went up by 150 pips
There are three schools of thought on what constitutes a trend line break. Strict, moderate, and lax.
Strict — These trend line users believe that as soon as a candle passes through a trend line, it is broken and a trade can be entered.
Moderate — These trend line users believe that as long as a candle’s body does not close beyond the trend line, it is not broken. That means a wick can poke through the line — like in the image above — but as long as the body doesn’t then the trend line is still active.
Lax — These trend line users believe that a candle must first break through the line and then the body must close beyond it. When the next candle opens beyond the line they finally consider the line to be broken.
