Now time to learn forex support and resistance. In the previous chapter, we learned about 3 types of forex analysis.
And a description of which questions are the best of the three methods of analysis.
In this chapter, we will learn more about forex support and resistance.
This is very important for traders to understand the basic concept of analysis based on this support and resistance.
The concept of forex support and resistance is the basic way of market analysis that many traders use this concept.
Although included in technical analysis, but traders who use charts and how to read the chart will pay attention to this lesson.
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Support and resistance forex basic
In forex trading, the price formed is essentially a mechanism of buying and selling volumes in the market.
Therefore, there are certain levels which are indirectly become strong area upon by traders as a price reversal point.
Where if selling volume weakens or if buyer volume weakens.
These price reversal points traders refer to as Support and Resistance in forex.
Take a look at the image below
From the picture above you see the zigzag pattern that occurs in a bullish trend where when prices have risen to a certain extent then prices bounce back down into the valley.
And when the price is below the valley, then the price goes up again continuing the bullish trend bypassing the previous highest price.
And the same pattern repeats when the price is considered too high then the price returns to the valley.
The price area at the top is the resistance and the price area in this valley is the support.
Actually, to determine this support and resistance the traders have different ways.
But basically, the area of support and resistance is an area that is hard to break by price.
And if the price successfully crosses that area then it is called a breakout.
Support and resistance lines psychology
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The concept of support and resistance if we take a simple example is, for example, you know an item with a price of $ 50, and one time the price drops to $ 30.
But the next day the price arise up to $ 50, then you thought that $ 30 was the best price you could possibly buy.
Then this $ 30 becomes a support point to keep prices from going down because psychologically there are many enthusiasts.
Support is also considered a floor because this price level prevents the market from moving prices down.
Conversely, resistance, if you hold an item and the price rises at a certain price level, for example, $ 60, but this level can no longer go up.
You as a trader expect the price to go up, but in fact, the price cannot go up any more because of insufficient market volume.
You would think that $ 60 is the best price for you to sell your goods.
Therefore this $ 60 becomes a resistance point that prevents prices from rising because psychologically many want to sell at that price.
Resistance is also considered a ceiling because this price level prevents the market from moving prices up.
How to identify the support and resistance in your charts
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Forex support and resistance are actually not an exact number, in determining support and resistance levels there are also various ways.
There are several methods that traders usually use in determining the price of Forex Support and Resistance, we will review them one by one.
Manually Draw Lines with candlestick
There is a simple way to determine support and resistance, by applying the following steps:
- Look at the history of price movements at a certain time frame.
- Find the highs and lows of these price movements.
- Draw a horizontal line at the highest and lowest points.
The example image above shows that the price broke through the support line, but apparently only retested and the price bounced back up.
Sometimes the support and resistance areas breakout, but sometimes it is only a retest and is usually marked with a shadow of a candle.
In determining support and resistance with a line, it does not always have to use a horizontal line, it can also form a diagonal slash forming a trendline, up or down.
Using the Moving Average
Moving averages are constantly changing lines that display and calculate past price movement data.
The lines formed at the moving average by some traders have a function to identify support and resistance.
In the uptrend, when prices begin to closer the moving average can bounce up as if there is a support that prevents it from going down.
But when the price is below the moving average, it’s mean in a downtrend this line acts as a resistance.
Using Pivot Points
Pivot points are one way to determine support and resistance by using certain calculation formulas.
The pivot point calculation formula can see support and resistance for up to 3 layers:
Resisten3 – (R3) = H + 2 x (P – L) Resisten2 – (R2) = P + (R1 – S1) atau P + (H – L) Resisten1 – (R1) = (P x 2) – L PivotPoint – (P) = (H + L + C) / 3 Support1 – (S1) = (P x 2) – H Support2 – (S2) = P – (R1 – S1) atau P – (H – L) Support3 – (S3) = L – 2 x (H – P)
- R = Resistance
- S = Support
- P = Pivot Point
- O = Open (today’s opening price)
- H = High (the highest price of the previous day)
- L = Low (lowest price of the previous day)
- C = Close (closing price of the previous day)
The image below is example support and resistance point with pivot point calculator
The value entered in the calculation of the pivot point is the value of the previous day’s price.
For example, if you want to calculate tomorrow’s pivot, the price data for today is entered.
Using Fibonacci Retracements
Fibonacci lines are lines formed by following Fibonacci rules.
Lines formed from Fibonacci form forex support and resistance points.
How to draw Fibonacci are:
- Find the highest point and lowest point on a timeframe
- Draw the Fibo line between the highest and lowest point.
- Determine the distance between the two points and calculate the position of 0%, 23.6%, 38.2%, 50%, 61.8%, 78.6%, and 100%.
Look the image below
In drawing the highest point to the lowest point, the obtained lines can function as support and resistance.
And with Fibonacci, we can see opportunities for future price rises and falls.
If the Fibonacci line is below the price, it will function as support, and if it is above the price, then it will function as resistance.
Using Price Gap
To determine support and resistance areas, some use gaps in candlestick charts that have occurred.
A gap is a jumping price position so that there is a gap between the closing price of the previous candle and the opening price of the next candlestick.
The gap will be a sign that determines a price movement will be a continuous uptrend or downtrend, or a reversal from the previous trend.
Therefore, gaps are also classified as areas of support and resistance.
After a gap occurred usually will be covered by the next candlestick, and the gap area will function as a support or resistance area.
Using Round Numbers
One unusual way to determine support and resistance is to use round numbers.
Round numbers like 1.0000, 1.2000, 1.1250, etc. tend to be important in support and resistance levels.
Because they often represent a psychological turning point where many traders will make buying or selling decisions.
How to find out support or resistance areas really breakout
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To answer this question, there is no definitive answer that can be used, some say there will be a breakout if the price really has passed the level of support or resistance.
But in reality, this is not always the case, sometimes after the price has been able to cross the support level and pass a few pips but it turns back bouncing and the breakout area becomes invalid again.
You can see in the example above, that after the price crosses the support area in this case at 1.4700, maybe when you look at this area successfully breakout, you will think that this is a valid breakout.
So maybe you have already opened short positions in the hope that the breakout area will become new support.
But look a few moments later, the price rose again and crossed the crucial area at 1.4700, so it can be said that the breakout that happened is invalidated again.
So from that, we can take lessons that traders should define support and resistance as zones, and not exact numbers.
Thus to help find these zones, it is better to plan support and resistance on a line chart than a candlestick chart.
The reason is that the line graph only shows closing prices while candlesticks add extreme highs and lows that can be misleading because often they are just “spontaneous” reactions from the market.
When you plan the area of support and resistance, of course you don’t want to just look at market spontaneity.
But you will be more aware of determining areas of support and resistance zones.
By using the line chart you can make the support and resistance zones easier than using candlesticks because on the line chart there are no high and low prices.
But you can visualize the zone using the horizontal lines.
Another interesting thing from support and resistance
- When prices cross through the resistance, the resistance has the potential to become support and vice versa when the price crosses the support, the support area has the potential to become resistance.
- The more often the price tests the resistance or support level without breakout, the stronger the resistance or support area.
- When the support or resistance level breaks, the strength of the follow-up step depends on how strong the support or resistance that has been broken has survived.
Forex Support and resistance are the basis of the lesson as a way to analyze the market.
Especially by using technical analysis.
The area of support and resistance is just a theory where when prices are already in the zone of support and or resistance.
Then the next price trend is a reversal of the direction of the trend.
The area seems to be a price barrier to not continue to go up or down any further.
How to determine this support and resistance, any trader they can use the various method.
However, it is better for those of you are beginners in forex trading and CFD to focus on the method of manually.
Learn to draw support and resistance lines either horizontally, upward, downward first, before learning other methods.
As you practice more often to map this area of support and resistance, you will find it easier to apply in your trading.