Support and Resistance Levels in Forex Trading

Learning technical analysis will give you the edge as a forex trader. It will develop your confidence in your ability to predict what will happen in the markets in the future.

But the most important drawback with most of the technical indicators is that they lag behind the markets. Lagging means part of the price action has already taken place before the movement is reflected by these technical indicators.

However, support and resistance levels especially those based on Fibonacci levels are considered to be leading indicators because they lead the markets in predictable paths. Now, when we say predictable, it does not mean guaranteed. But it can be pretty close.

Support is the price level that a currency pair has trouble breaking through to the downside. Support is also referred to as the floor of the currency pair price movement.

Resistance is the price level that a currency pair has trouble breaking through to the upside. Resistance level is also known as the ceiling of the currency pair price movement.

Many new forex traders find it surprising that there is a strangely predictable and reliable price action that takes place at the support and resistance levels. Most of the time, they will find the price action oscillating between the support and resistance levels.

Why it is that majority of the people begin buying and selling at the given support and resistance levels. There is nothing on the charts that forces the people to do so.

A simple explanation is this that majority of the forex traders think the support level as the best price available to them and considers it an excellent opportunity to buy once it reaches the support level.

Similarly, at resistance, majority of the currency traders think that currency pair is not favorably priced and has become overpriced. So they consider it as an excellent opportunity to short the pair.

You will have an edge and an advantage in your currency trading if you are capable of accurately identifying and predicting the support and resistance levels in the markets. As more and more traders use technical analysis in trading and calculate the support and resistance levels, the more these levels become self fulfilling prophesies.

One important indication of support and resistance levels is that price level is reached a number of times but it is never breached. Support and resistance levels can be horizontal for a ranging markets or they can be sloping up or down for a trending market.

What happens at the support level is that as traders begin to sell the currency pair and take profit, the price of the currency pair starts to drop down. As the price starts to fall, other forex traders who were interested in buying the currency pair watch how far it will go down.

Most of them have done their calculations as to how far the price level will drop down before they can go long. Past price action tells them that the price offered at the support level is the best price under the present market conditions. So when it reaches that level, most of them start buying and go long.

When there are more buyers than sellers, the price of the currency pair starts to rebound and rise. It rises till the resistance level determined by most of them when majority decide that the currency pair is now over priced and start selling.

This oscillating price action keep on repeating itself until and unless there is a fundamental shift in the markets that forces new levels and a new direction.