Finding Support and Resistance in FX Trading

Most retail traders coming to the Forex market buy and sell currencies as a result of the technical analysis. Known as the art of forecasting or using a chart to project future levels, technical analysis became the favorite way to analyze a currency pair.

One of the oldest technical analysis concepts refers to finding support and resistance levels. More precisely, to use previous levels and forecast future ones.

For support and resistance levels, traders use trendlines, channels, and other Forex technical tools. Both support and resistance form either on the horizontal or following the price in a dynamic manner.

Therefore, we can talk about horizontal and dynamic levels. Also called classic support or resistance, the horizontal levels are the standard interpretation of the concept.

Traders simply draw a horizontal line or area to highlight the inability of price action to break through.

One thing remains valid in both concepts, dynamic or classic: once broken, a level changes its interpretation. Hence, support becomes resistance and resistance becomes support.

How to Find Future Support and Resistance Levels – EURUSD Example

A rule of thumb tells that the bigger the timeframe, the stronger the impact on a currency pair will be when using support and resistance analysis. Part of market geometry, support and resistance levels reject prices from levels known in advance.

To illustrate the concept, we’ll use the EURUSD recent daily chart. By recent, think of the price action in the last couple of years or so.

Support And Resistance

The chart above shows what the EURUSD did for the entire 2017 and so far in 2018. It rose in a bullish trend.

By connecting two points on the left side of the chart corresponding to the bottom and the first higher low, a trendline results. After all, two points are enough to build a trendline.

Projecting it on the right side of the chart gives potential dynamic support or resistance levels. The first one turned out to work as a support, and the second one turned into resistance as the price broke the dynamic support.

The highlighted grey horizontal area shows classic or horizontal support that still holds. When the two (horizontal and dynamic) meet at the same level, that’s a confluence area, with even bigger implications in the overall technical analysis interpretation.

Conclusion

Trading support and resistance levels is a simple way of spotting where the market may hesitate. After all, this is what technical analysis does: offers an educated guess about future price action.

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