Support and Resistance in Trading

Welcome to BasicForexOfficial —Where will be trying to breakout the forex basic concepts from scratch. In this article, we will explain support and resistance - two of the most important trading concepts. If you are a beginner, learning these basics will improve your chart reading skills and help you make better trading decisions. We'll dive into what support and resistance are, how to plot them, and how to use them effectively with entry, stop-loss (SL), and take-profit (TP) levels.

What are support and resistance?

In simple words:

Support  is the price level where a currency pair finds buying interest. At this level, the price usually stops falling and may reverse. It acts as a "floor" below which prices struggle to break.

Resistance  is a price level where a currency pair often finds selling interest, causing the price to stop rising or reverse downward. This acts as a "ceiling" above which prices struggle to break.

                                                             

Why support and resistance are important

Support and resistance levels are important because they reflect market psychology. Traders often buy at support, expecting the price to rise, and sell at resistance, expecting it to fall. These levels also help traders identify entry and exit points for their trades.

How to plot support and resistance levels

Plotting support and resistance on a chart is easy with a little practice. Here's how:

Identify key price levels:  Look at past price movements on the chart. Where does the price tend to reverse more than once? These areas can be potential support or resistance levels.

Check for Repetition:  The more times the price bounces off or reverses a certain level, the stronger the support or resistance level is.Consider ranges: Support and resistance are not exact values ​​but more like zones or ranges. It is often more accurate to mark an area rather than a line.

Use horizontal lines: Draw a horizontal line across these surfaces. For example, if a currency pair bounces consistently above 1.1000, mark that price as support with a line.

Types of support and resistance

There are two main types of support and resistance levels in Forex trading: major and minor.

Major Support and Resistance: These levels form over a longer period of time and have a stronger impact. They are visible on higher time frames such as daily or weekly charts. Critical levels are often difficult to break, as these are key price points.

Minor support and resistance: These levels are formed on shorter time frames, such as 1-hour or 4-hour charts. They indicate short-term price reactions and are less reliable but can still offer good trading opportunities for day traders or scalpers.
                                                      

                                                               

         

Entry point, stop loss (SL) and take profit (TP) at support and resistance

Entry points

To use support and resistance levels as entry points, you need to look for price reaction near these levels:
Buy on support: If the price approaches a support zone and shows signs of holding (such as a bullish candlestick or reversal pattern), it may be a good opportunity to buy.

Sell ​​at resistance: If the price reaches a resistance level and shows signs of struggling to break it (such as a bearish candlestick or reversal pattern), it may be a good time to sell.

Stop Loss (SL)

Setting a stop loss helps you control risk

To buy near support: Place your SL just below the support level. If the price breaks below this, your SL will protect you from further losses.

To sell near resistance: Place your SL just above the resistance level. If the price breaks above it, your SL will limit potential losses.

Take Profit (TP)

Setting a TP allows you to lock in profits.

For buyers: set your TP close to the next resistance level. Thus, you reap the benefits if the price rises as expected.

To Sell: Set your TP close to the next support level, so you can lock in profits if the price drops.

 

Example of a Trade Using Support and Resistance

Suppose the EUR/USD is trading in a range, bouncing between 1.0800 (support) and 1.1000 (resistance)

Buy Entry at Support: When the price approaches 1.0800, you can look for bullish signals like a hammer candlestick, which may suggest a bounce.

 
Set SL: Place your SL just below 1.0780, in case the price breaks support.

 
Set TP: Set your TP near the 1.1000 resistance level to capture potential gains.

 

Tips for Using Support and Resistance

Wait for Confirmation:   Don’t jump into trades the moment the price hits support or resistance. Wait for a confirmation pattern to increase your chances of a successful trade.

 
Use Higher Time Frames for Major Levels:   Higher time frames, like daily or weekly charts, provide more reliable major support and resistance levels.

 
Combine with Other Indicators:   Indicators like moving averages or RSI can help you confirm signals from support and resistance levels.

 

FAQs About Support and Resistance 

1. What is the difference between support and resistance?

Support is a price level where buying interest tends to appear, preventing further drops. Resistance is where selling interest is high, preventing further price increases.

2. How do I plot support and resistance?

Look for price levels where the currency pair has reversed multiple times in the past, and draw horizontal lines across these areas on your chart.

3. What are major and minor support and resistance?

Major support and resistance are strong levels formed over a longer time frame (daily or weekly charts) and are harder to break. Minor levels are on shorter time frames and indicate smaller, shorter-term reversals.

4. How can I use support and resistance for entry points?

Buy when the price bounces up from support and sell when it reverses down from resistance. Look for confirmation signals like reversal patterns or candlestick formations.

5. Where should I set my stop-loss and take-profit?

Place your stop-loss a few pips below support (for buys) or above resistance (for sells) and your take-profit near the next significant resistance (for buys) or support (for sells) level.

CONCLUSION

By using support and resistance effectively, you can improve your trade timing and make better decisions on where to enter and exit trades. Remember to practice plotting these levels and refining your skills to become a more confident trader.