Technical analysis is a predominant feature in trading. This is across the board of all markets, too. Support and resistance in forex are two of the main pieces of analysis that traders conduct. They signify the points at which a price could breakout into a discovery range, a bullish signal, or a bearish signal.
Understanding how they take shape on a forex chart can be difficult. Suppose you are trading forex as a beginner or other markets such as cryptocurrency. In that case, it is important to factor in other aspects before deciphering where a support and resistance line has formed.
Support and resistance lines look the same on plenty of other asset charts. If you want to establish how they counteract and work in tandem with major foreign currency pairings, we can hopefully shine some light on this for you today.
What Is Forex?
The best place for us to start today is to explain these concepts to you. However, we want to ensure that you understand what forex is too. You are likely aware of forex trading if finance and trading are a passion of yours. If you’re a beginner in forex trading, taking onboard tips is a good start, but make sure you understand what forex is before trading with your hard-earned money.
The foreign currency exchange market (forex for short) has more liquidity and 24-hour trading volume than any other global market. Throughout any 24 hours, trillions of dollars worth of activity occur. It is challenging to comprehend the enormity of this market. There is so much scope for trading activity. In addition, there is also a major opportunity for professional traders who understand in-depth analysis.
To put it as bluntly as possible, dozens of foreign currencies worldwide exist. However, the foreign currency market focuses on the seven major currencies. Even though some of the countries on this list aren’t in the top seven biggest economies in the world, the amount of trading volume their currency is subject to on a 24-hour basis means they are the top currency pairings.
These currencies are interchangeable pairings, and certain markets, such as the United States Dollar & Euro (USD/EUR) pair, will see more activity than an Australian Dollar & New Zealand Dollar (AUD/NZD) pair. The other three currencies to look out for are the GBP (Great British Pound), the Japanese Yen (JPY) and the Canadian Dollar (CAD).
As these currencies are the main method of legal tender for countries that span across multiple time zones, the forex trading market is a 24-hour marketplace. Stock markets are only open during business hours. However, forex trades occur throughout the day and night, similar to cryptocurrency.
Will Support And Resistance Line Knowledge Make Me Profit?
Support and resistance levels are something that the majority of experienced traders will not only understand but will also look to use to their benefit. Even with major market knowledge, there’s no guarantee to make money trading forex or any other asset.
It is important to note that no matter how many people on Instagram tell you that forex is an easy way of creating generational wealth, there’s no such thing as a get-rich-quick scheme. It can make you money, but it can be a painful trial-and-error process which can take years to perfect.
You can put yourself at an advantage by trading with your head, conducting thorough market research and setting up automated buy and sell targets, which we will discuss in more detail later in the piece. Even if you perform all these tasks before trading forex, you could find yourself trading at a loss. So let’s take a closer look at these types of support and resistance lines individually and establish how to identify them yourself.
Although support and resistance lines are often paired together in any discussion regarding this trading method, they operate differently. A support line is the lower end of a price where a falling price will encounter a level where it will rebound. A support line is often used by traders who implement strategies such as swing trading and day trading to attempt to time an entry point into a successful trade. Another method includes more complex patterns, such as the diamond chart pattern.
If you are trying to identify a forex support and resistance line, we will begin by highlighting what it may look like on a chart. This isn’t specific to one forex pairing, this could be across a range of pairs, or it may be on the chart of one pairing at that particular time.
As you can see on the above chart, despite plenty of price action, some of which is volatile, the price drops to the same level before rebounding again.
What’s The Main Factor That Determines Support Lines?
Multiple factors can determine forex support resistance. Many professional traders and market analysts believe that the overriding factor is that there’s enough demand at that price. The demand mainly stems from professional and institutional traders having automatic purchase orders set up at roughly the same price.
Given that the markets are worth trillions of dollars daily, it is rarely just one factor that will cause the support to remain solid or buckle. However, most traders and analysts agree that this basic level of demand is the deciding factor.
How To Understand Support Lines In A Simple Fashion
Although the idea of resistance and support levels may seem difficult to comprehend, the main thing to remember is that it deals with the basic concept of supply and demand. It will not move below a certain level if there’s enough demand to purchase the forex you are trading at the support price.
In the event of a forex market crash, many large investors or traders will remove these purchase orders. Once the support is broken, it can signal serious fear and uncertainty in the market. Larger market sections operate via automated trading or algorithmic trading, as it is known. It can be one of the main causes of flash crashes, as once support is broken, it results in a mass sell-off conducted by spot traders and automated trading bots set up to sell at specific points.
We don’t want to be in danger of oversimplifying what causes these volatile swings in such a highly complex market. You can have all the facts and figures required to register what support and resistance lines look like, and you could still trade at a loss. This is because the market is volatile and doesn’t follow historical data. Many variables, such as world news or central government economic policies, can drive it too. Often, it can be a number of these factors combined.
What Is A Resistance Line?
If support lines are the basement price of an asset, so to speak, then resistance lines are the ceiling. Support and resistance zones mean that an asset will operate within this price range, and the support and resistance lines bookend the highest and lowest price over a certain period.
Resistance lines are the mirror image of support, as you can see on the support and resistance chart below, which covers resistance and support levels. Support and resistance trading methods operate differently.
Specifically, support and resistance forex trading look the same on a chart as any other type of trading. It takes the same shape as other asset charts. Wherever the supply and demand meet at an apex, this is where you will find support and resistance lines specified. Understanding resistance trading is a different strategy compared with support lines.
As you can see, the resistance and support lines are identified and take shape within a specific price range.
What Defines A Resistance Line?
When we discussed support lines and the factors that cause them to form and provide a price basement, there are similar factors that cause a price to encounter resistance. Again, supply and demand play a big factor. It can also be driven by an asset price reaching its previous all-time high and traders setting up an automatic sell range based on this information.
However, suppose traders operate using smaller timescales, such as scalp traders. In that case, they will try and focus on specific periods in the market, such as five minutes, ten minutes or thirty minutes, but it is a much more difficult concept to grasp over a very small period.
Support lines are driven by automated trading too. For example, institutional investors, the likes of which we touched on earlier, will use vast resources. This includes specialists and analysts to determine where to set a selling price for the asset before a correction is due. Trying to time the top is extremely difficult for any trader. Even though institutional investors have more resources at their disposal, they will very rarely time the top.
However, these huge corporations, such as investment banks and pension funds, use similar analyses and will generally identify the resistance line in roughly the same region. Usually, this means the resistance and support lines will follow this trading behaviour.
The Fibonacci sequence is one major example of a method traders implement to calculate where the support and resistance line will fall over a specific period, either over 24 hours or a week. It is arguably the primary method professional traders use as support and resistance indicators.
What Are Other Resistance Support Indicators?
The Fibonacci sequence is the most popular and widely used indicator, which provides a solid and fairly accurate summary of where support and resistance levels lie. Another few indicators are prevalent in forex trading. However, other indicators also exist, and it is important to familiarise yourself with them.
Alongside the Fibonacci sequence, the Camarilla pivot is another reliable support resistance forex indicator. This indicator’s popularity is due to the simplification of the data analysis.
Another factor is that the market orbits in conjunction with Camarilla pivot levels. You can adequately identify support and resistance levels using this method. Whether it is throughout 24-hour trading volume or the entire week, they are a reliable and trusted indicator for traders who specialise in this field.
The simplification we mentioned focuses on chart analysis. It has six standard lines, 3 red and 3 green. You don’t have to adjust it as the data naturally identifies these positions, and it automatically emerges on a trading day.
Using this type of chart analysis, you can trade forex by implementing a long strategy, where you enter your trade just below the initial support line or within a 10% range. Professional traders may use this range to long their chosen asset and supercharge their gains. This is a margin call and is usually specific to professional traders.
A margin call is just one forex trading method you can implement into your arsenal. As well as any strategy you use, it is important to factor in additional costs, such as swap fees.
Murrey Math Lines (MML)
MMLs were predominantly the work of legendary trader W.D. Gann who pioneered chart analysis identification methods by using proven mathematical formulas and other factors such as geometry. Several classifications of Murrey Math Lines exist. It uses a range of 7 different lines to specify the optimum support and resistance locations.
As you can see on the AUD/USD chart above, the main defining feature of an MML is a horizontal line across the price action of a chart. It uses quantum mathematics to identify premium entry positions to execute a buy or sell position across support and resistance lines.
Wolfe Wave Patterns
The Wolfe wave pattern is the final resistance support indicator we will look at today. You can accurately ascertain the support and resistance range where the forex price operates and where it is precisely pinpointed.
Based on the bullish and bearish Wolfe wave charts above, you can use the following classifications to identify them properly. This criterion is rigid for all Wolfe wave patterns.
The open range between the first two points creates a shape where the third and fourth waves must stay constant. Both pairs of waves should be equal. The fourth wave originates within a range of the opening two waves, and the final fifth wave breaks through the opening and third waves.
To correctly identify this support and resistance level takes great skill. Professional traders primarily use practice and skill to manage it effectively. It is another highly technical piece of analysis. If you’re beginning in the market, it might be best to avoid these indicators and stick to more conventional and traditional methods whilst you find your feet.
The Benefits Of Correctly Identifying Support And Resistance Lines
As we have touched on in today’s piece, support and resistance lines give an insight into the range of an asset. Instead of trying to decipher and digest all of the chart analysis and information, you can focus on a specific price range, like looking through a letterbox.
If you’re in a position to spot these patterns emerging, you can adjust your trading psychology accordingly. Once you have this range, you can add a further layer of security. One way to do this is by setting up automatic buy and sell orders. Another benefit of automatic buy and sell orders is removing elements that conspire against you. The overriding one is trading on negative emotions.
The Negatives Of Support And Resistance Lines
Winston Churchill said, “those that fail to learn from history are doomed to repeat it”. Whilst this quote can apply to general business failings, the forex market is a far more malleable and substantial sector.
One of the main things many traders learn early on is that the market does not follow historical patterns. However, news can drive it predictably if you pick up on it early enough. With that said, markets behave differently, and unpredictability is a key component.
This may sound contradictory, given that we have thoroughly explained how support and resistance form based on historical data. Chart analysis is beneficial but needs to be part of a bigger strategy.
Support and resistance lines are vital tools traders use, but they shouldn’t be the only tool you use. The same applies to various other methods we have touched on today. Performing copious amounts of research, fully understanding these markets and understanding how the news moves the markets are all good ideas. However, you can still lose all your capital as the market is an unpredictable and unforgiving terrain.