Jan 02 2022 0
In forex technical analysis, there are many different tools and techniques that traders use to identify the trends and directions of the prices. And one of the most important things in technical analysis is knowing what support and resistance is. They are used very frequently in trading. As a result, there are countless support and resistance indicators developed by traders. For example: the Kumo cloud of Ichimoku, EMA 20, 50, or Fibonacci… Each technical indicator has its own strength and weakness. Today we’re going to learn about the support and resistance indicator.
What is Support and Resistance?
In technical analysis, the lines connecting important peaks and prices are called support and resistance lines. Traders use these lines to determine entry points.
- Support - the area where buying pressure predominates over selling pressure. This zone may be considered suitable for opening a long position. Most traders prefer the role of buyers, when prices approach the support area.
- Resistance - the area where selling pressure prevails over buying pressure. Traders will open a sell position when the price approaches the resistance.
How to find the Support and Resistance?
Support is the line connecting the price bottoms. Depending on the main Trend line (price movement is dominant), the support area may be in the form of angled lines or horizontal lines.
- With the uptrend of the trend, the support line has a positive tilt.
- With the trend of stabilizing the horizontal support line.
Resistance is the connecting line of peaks. Depending on the main trend, this level has either an angled or horizontal line.
- With the downtrend of the trend, the resistance line has a negative tilt angle.
- With a stable price trend, the resistance line is horizontal.
When determining the uptrend of prices, each subsequent support level must be above the previous level. The same is true for resistance levels. In the opposite case, for example, when the support falls to the previous price bottom, this indicates either that the uptrend ended, or the trend turned to horizontal fluctuations.
Accordingly, in order to identify a downward price trend, each subsequent support level must be below the previous level. When the support level is higher than the previous level, we can predict the possibility of changing the current trend.
When the upward trend turns into a bearish trend, the resistance level becomes a support level. On the contrary, the support level becomes a resistance when the downward trend becomes a rising trend.
Trading with Support and Resistance indicator
The Support and Resistance indicator is the most basic technical analysis tool that every trader needs to know if he wants an effective forex trading strategy. When traders use price models or technical indicators, they must combine resistance - support to increase accuracy.
When introduced to the Support and Resistance indicator, most traders feel very simple and effective. Simply connect the top/bottom levels and wait for the price to react to the new price ranges. However, when entering the actual transaction, it is a completely different story. The prices you draw are continuously broken. The market runs and almost ignores your price lines. Then you turn to blame for the tool.
The problem is not that the price does not react to the Support and Resistance indicator but that you have drawn it incorrectly. Like many other technical analysis tools, you need to practice a lot. The past is always right and the future is the problem we are facing.