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Effective support and resistance lines

In this educational section, we want to further discuss the concept of support and resistance including its effectiveness behind each analysis. This article aims to increase understanding and develop every trader’s implementation of the theoretical concept built behind support & resistance analysis.

We’ll also share various market signals which can generate greater trade positions when combined with the support and resistance theory.

Most traders have heard about what support and resistance lines are for and how to spot them on a forex market chart. But, there are only a few who truly understand their purpose and how much potentials it has for every trader.

At the end of this article, you will be able to integrate trade setups that will provide great potential and help you identify the entry and exit points in a trade.

Pie scenario:

Support and resistance lines Pie Scenario - Finance Brokerage

To remember how support and resistance works, let us imagine a newly-baked pie. Pulling that pie out of the oven will cause great pain due to the hotness of the muffin pan. The first reaction is to pull out your hand away from the hot pan and to wait for some time on attempting to pull it out again. Upon the second attempt to pull out the pie, you’ll become more cautious and will initially check if the muffin pan is still hot.

Like the pie scenario, forex market prices react on the hot zones. Let’s say on an AUD/USD currency pair if prices approached a peak where it’s too hot to handle, trying to hold on to the hot zone of the market will only burn you down.

Support and Resistance lines graphic sample one - Finance Brokerage

Looking at the graphic above, rather than coming back down on the “not too hot to handle” level, the market may go higher and continue to move away.

Mostly, the market price pauses to decide where to move in once the currency pair reached their level of strong psychological or technical importance. Usually, on a major trend, the market price ends when they meet the resistance on the areas of peak spots.

Support and Resistance lines graphic sample two - Finance Brokerage

Resistance zones are unique wherein when they broke into the ceiling spot, they will become the new support level on the market price. The same happens to the support zones as they will become the new resistance level once the price broke under the support spot. Looking at the sample chart above, zones marked by the red line represent the support level becoming the resistance level.

 

The complexity of support and resistance:

Support and resistance levels are very much visible in various time frames and markets. These levels aren’t just particular on a single market chart or currency pair.

Support and Resistance lines graphic sample three - Finance Brokerage

On the sample chart above, the red line is the resistance area for this currency pair market. There are three specific marks where the price attempted to break out the resistance level but failed to do so. Because of the strength of the resistance line, traders can soon expect that these market will provide a strong support level if the price breaks above the resistance level.

Analyze the chart below.

Support and Resistance lines graphic sample four - Finance Brokerage

An important idea to keep in mind about the support and resistance levels is that they make spot memories on currency pairs. Strong support and resistance levels stay on a specific currency pair chart for a long time. Market price could approach the next spot levels either in a week or a year.

Forex market is dynamic.

Not all educational articles about support and resistance levels will say it directly, but these levels aren’t always 100% effective. Both levels do not always influence the market. There are other aspects of delivering the market price towards support or resistance levels without delay.

Support and Resistance graphic sample five - Finance Brokerage

Looking at the example chart above, the currency pair market price did not pause at any moment. It went straight like it has no importance at all. This type of scenario confuses forex traders because of their assumption that once a price reached a support or resistance level, it will bounce away.

Support and resistance levels will help develop trader’s odds by analyzing the various probable outcome, however, always remember that there is no way that these levels guarantee a 100% success. Winning in a forex trading needs more effort in creating a strategy that will maximize the chances to win.

Support and resistance’s effectiveness on Forex trading

Trade triggers should be integrated to take the advantage opportunity of a support and resistance levels. Learn various effective strategy combinations that work well on support and resistance.

Now that we’ve stated facts that support and resistance aren’t 100% accurate predictions, what makes them essential to forex market trading? The answer is to not focus on executing the trade every time a support or resistance level appears. Traders need to mark the number of times when support or resistance provided a good entry point and have risk management to gain reasonable profit at those times. It isn’t that important how the currency pair reacts every time it goes near the support or resistance levels. It will be better to create rules in scenarios that will make traders profit more on the winning trades than lose on the losing trades.

Being a successful trader doesn’t mean that you need to win every single trade. There will always be a certain downfall, but losing big time is a mistake committed by a trader who doesn’t properly take advantage of planning setups. With proper forex market analyzing, the odds of gaining success increase and future risk management performance develops.

There are various ways to indicate if a price reacts to either support or resistance levels. In our future posts intended for experienced traders, you’ll learn that those methods are very much effective within the forex trading market.

Integrating support and resistance

Before going through the strategies that we will share wi