Support and resistance are concepts that are often used in forex trading.
To be sure, every trader has their own opinion on how to measure support and resistance.
Let's look at the theoretical basis.
As seen in the diagram above, the zigzag pattern is moving upwards (bullish market).
Every time the price moves up and then will go back down, the highest point reached before the price moves down is called the resistance level. While the lowest point reached before the price moves up again is called the Support level. With this, either support or resistance will continue to form all the time when the price moves up or down.
Determine support and resistance
The thing to remember is that support and resistance levels are NOT ABSOLUTE VALUE.
Often where the price moves beyond the marked support/resistance line. However this is not a breakout/breakdown, but the market is testing these levels.
Test levels are usually indicated by a tail on a candlestick chart.
Notice the tail of the candlestick is testing the support level of 1.4700 .
This happens as if the market is breaking down support prices.
When the price starts to break through the support level, you might think that a breakout will occur, but it doesn't.
So how do we know that a support level is being tested or that a price breakout is happening?
Unfortunately, there is no definite answer to this question. There is an opinion that the support or resistance level breaks if it manages to pass the closing price. However, this trend breakout is not always the case.
A similar example as above and see what happens when the price actually closes past the 1.4700 support level.
In this case, the price closed below the 1.4700 support level but eventually rose back above the level.
As can be seen in this chart, the support level has not changed, but is getting stronger. So that you are not deceived by a "fake" breakout like the example above, change the mindset that considers the support or resistance level as a fixed price, but only a price range.
With the %K or K-line chart you can determine the "area" of support or resistance. Because, %K charts focus on providing information about closing prices, compared to candlestick charts which provide information on highs and lows.
The highs and lows on candlesticks often “trick” traders because usually these two prices are formed from the market reaction. Just like when you see someone doing something out of the ordinary, when asked, the answer is: “sorry! just a reflex."
So, when determining areas of support or resistance, avoid using market reactions or reflexes. Look for the actual price movement using the %K chart for one. Look for areas where the price movement forms more than one peak or valley.
Characteristics of support and resistance:
- When the price crosses resistance, resistance has the potential to become support.
- The more often a support or resistance level is touched without being able to be broken or breakout, the stronger the support or resistance area is.
- When the support or resistance level is successfully broken, the strength of the breakout really depends on how long the support or resistance area is held.
With real practice, you will be able to identify areas of support and resistance areas easily.
In the next lesson, we will teach you how to trade with diagonal support and resistance levels, otherwise known as trend lines.