Support and Resistance

Understanding support and resistance is an important reference in forex trading analysis. As is known, prices in the forex market are formed according to the mechanism of buying and selling forces.

At one time, the buying power could be greater than the sell power which had previously pushed the price down in a bearish trend. On the other hand, there are times when the sell power manages to outperform the buy power that previously dominated. If that happens, a point called a price reversal will appear. This is what is then referred to as the point of support and resistance in the trading world.

No doubt, understanding support and resistance is a basic knowledge that novice traders must know, before they learn more about technical analysis. Why do support and resistance points form? What is the trigger? The answer is because of the profit-taking actions carried out by traders.

Profit taking is done when traders feel that the price level shown is already too high, so they tend to end their long positions. This then causes the price to drop after reaching a certain high level. This is what is known as resistance.

On the other hand, Take Profit action also occurs when traders feel the current price level is too low, so they end their short positions. The price was corrected up and triggered the emergence of a support point.

Examples of Resistance and Support Points

Resistance Point

A trader must be familiar with seeing the phenomenon of a price that is difficult to move through certain levels. Below is a chart of XAU/USD in the Daily Time Frame that illustrates the situation.

The price seems very difficult to rise above the point 1358.88 and continue the upward movement from that level. This point is known as resistance. Its function is like a roof that prevents a price from moving up through it. In other words, resistance is a point that acts as the "upper limit" of a price movement. As long as this resistance point is valid, traders can use it as a benchmark for sell entries.

Support Point

On the other hand, there are also so-called support points. This support point is like a floor that prevents the price from going down through it. This area is created when a price stops falling, then reverses up. In short, support is the lower limit that prevents the price from continuing its weakness. Below is an example of a support point for XAU/USD in the Daily Time Frame. The price seems difficult to penetrate the lower limit of 1310.31. As long as the support point is still valid, this level can be a moment for traders to make an entry buy.

Use of Support and Resistance on the Trading Platform
It requires careful observation in determining support and resistance levels on the trading platform. It usually takes minutes, even hours to understand support and resistance, because levels can change over time.

Mapping support and resistance on trading charts is usually applied by technicalists, before they start their analysis with certain indicators. Here's how to use support and resistance on the trading platform:

1. Creating a Trendline

As explained above, support and resistance are constant in preventing price from moving higher or lower. But for the long term, the price will definitely move up or down according to the trend that occurred at that time.

For traders who follow the trend following strategy, the High and Low points that form the price trend are often also positioned as support and resistance. When stretching a trendline (trend line), the High points on the downtrend will become resistance, while the Low points on the uptrend line can also function as support. Examples can be seen as follows:

2. Identify Double Zero (Psychological Level)

By understanding support and resistance, we will also be able to identify Double Zero. What is Double Zero? Basically, Double Zero is a price level that has a round number (two zeros) at the end, and is often referred to as a psychological level. Examples of round number levels are 1300, 1400, 1500, 1600, and so on.

Trading experts who observe price movements over the long term, often conclude that prices actually tend to reverse when they reach a certain round level. This is likely due to market psychology, which generally assumes that the price has reached its saturation point when it reaches Double Zero. In addition, this round number is believed to be a strong level where the big banks are also setting their targets.

An example of the appearance of Double Zero as resistance can be observed on the GBP/USD chart below:

3. Applying Fibonacci Retracement
Fibonacci Retracements have a significant role in monitoring and understanding support and resistance. Usually, these tools are juxtaposed with technical indicators as a complement to the trading system. No wonder Fibonacci Retracement is a favorite indicator that is often used by traders.

How to draw the Fibonacci Retracement line can be done by looking at the distance of the last few candles, for example the last 60 candles. That is, we only need to identify which are the highest and lowest levels of the last 60 candles that line the right side of the chart. We can see the result in the following image:

From the Fibonacci Retracement levels above, it can be seen that in a downtrend the price experienced several retracements which were stopped at the 0.5 and 0.382 levels. The range 0.382 was even tested twice, before the price then weakened again to the Fibonacci Retracement 0 level. From here, the 0.382 level could be a reference for strong resistance when the price bounces up from the 0 level.