Definitions
- What are Support and Resistance levels?
- Properties of support and resistance levels
- How the support and resistance levels are formed? What is going on Forex at this time?
- When there is the break of support and resistance levels?
What are Support and Resistance levels?
On Forex charts support and resistance are the lines at certain levels and when the price touches them it changes the direction.
These lines show levels of support and resistance of the price chart for any currency pair.
Resistance level is always higher than the current price level, and when the price achieves this level, it resists not letting the price to break himself below.
Support level is below the current price and when the price reaches the support level, it doesn’t let break itself down giving the support.
To determine resistance and support with maximum accuracy traders build support and resistance levels on several different timeframes simultaneously.
The highest time-frame, has the most important support and resistance levels.
Properties of support and resistance levels
- Support and resistance levels help determine the key price levels, when the price achieves these levels it can turn around and start moving in the other direction. This allows to determine the point of entry (if the price is pushed away from the support line) and exit from the market (if the price is close to the level of resistance).
- Levels of support and resistance can be reversed. If the price breaks the resistance level, this level becomes the support level and doesn’t let the price below. The similar situation occurs with the level of support. If the price breaks this level, it becomes the resistance level. However, the Forex market is unpredictable, and the price, once breaking down the level of support, can break it up again from the bottom, and the level of support becoming resistance level again becomes the support level on the chart.
- Support and resistance levels help to develop the trading strategy, making it more profitable for the trader.
- The main Forex patterns are forms with the support and resistance levels.
How the support and resistance levels are formed? What is going on Forex at this time?
On Forex market the price is the certain agreement between “bulls” and “bears”.
If “bulls” consider the price low enough, they buy.
When the volume of transactions increases the demand for currency grows too, and with it the price of the currency.
After the certain period of time, the activity of the “bulls” is falling, and the activity of the “Bears” increases.
At some point, the activity of “bulls” and “bears” is balanced, this equilibrium point is called the resistance level.
When the support level is formed the inverse operations happen.
Activity of “Bears” is reduced, and at this time the activity of “bulls” increases.
And when the price reaches the equilibrium point support level is formed.
The important point is that at any point on chart, levels of supply and demand for foreign currency are balanced.
When there is the break of support and resistance levels?
On the Forex chart support and resistance levels can be broken in the case:
- Sharp reaction to the news (change of interest rates by central banks)
- Changes in the macroeconomic situation in the world (the crisis in the EU and pending the decision about Greece or Cyprus).