Forex support and resistance indicators

On August 7, 2012 | By | In Forex tips

The best and most important indicators – forex resistance and support levels

Forex trading support and resistance indicators can be defined as currency levels on a chart acting as an obstacle or barrier and preventing the currency price movement through that barrier. When the obstacle is reached, price may reverse and go in the opposite direction because of the traders buying or selling activity at this level. This currency indicator is one of the most important not only in the currency investment market, but also in the stock, commodities and other financial markets. Many profitable forex strategies won’t manage without resistance and support levels.

How to identify horizontal support and resistance lines

They are best used in ranging market when there is no trend or it is accumulating exhausting.
In this chart we can see that when the EUR/USD currency pair price reached 1.3450 (18 – 21 February) it reversed and went upwards to the price near 1.3700. That’s 250 pips, so a decent profit can be made. The bottom marked with number 1 already suggests that if this level was to be reached one more time, investors could be buying the currency, expecting it to bounce of that support level one more time.

The second time the price almost reached the level – it was short of a few pips. Now the second floor or support already gives the opportunity to enter the trade, placing stop loss below the first bottom price. After reaching the low level, it went up to almost the same resistance or ceiling level – marked with number 2. We could have a decent profit of 240 – 250 pips. Now, when the price reached the resistance line marked with no. 2 it also reversed, meaning, all the profit that we accumulated from buying the currency pair had to be closed and the opposite trade (sell) entered.

The bottoms 3 and 4 have to be treated carefully – especially no. 4. Why? Because it breached the support line in a few pips. That is why you have to place stops accordingly – 15 – 25 pips is enough in this kind of forex support and resistance strategy. The same can be said about the no. 3 resistance level. The ceiling line was also breached, and with a tight stop you could suffer a loss. This particular kind of trading is tempting because of high risk/reward ratio – risking only 15 – 25 pips you can gain 200 – 250 pips in one trade and you could do that two or three times.

Support and resistance trading in trend conditions

Forex resistance and support trend linesCurrency price may range between certain levels, but it can also move consistently in one direction – that is usually called a trend. In this particular uptrend example we can see that the currency price is moving upside. After some movement, the price meets the resistance level and starts to pull back, which means, traders are closing their profits.

This can be clearly seen when the price reaches resistance level 2. After 1 day, when the price reaches support level no. 2 it bounces and quickly moves upwards. Now we already have two clear support points from which we can draw a trend line. This trend line along with other indicators will show the future entry point. I might have skipped the no. 3 support level, because it did not reach the support line. However, no. 4 offers excellent opportunity for a long trade with 200 pips profit. Price falling towards the support of the trend line always draws the investors’ attention.
The same, only opposite rules apply to the downside – falling trend.
One more thing – I suggest to take only the trades along with the trend – if the price goes up – just buy, if falls – just sell. Do not try to predict the tops and bottoms and trade against the trend. The golden rule is trend is your friend.

Round numbers of a currency

Currency round numbersThis is already some psychological resistance/support level. It is believed that the currency price may have some difficulties and stronger barrier overcoming round numbers, like 50, 100, 200 etc. Due to the rising number of placement of investors’ orders near round price levels this holds true.  The question is how long that barrier will hold, especially, when the trend is in that direction.
Identifying future points of trade entries relying on the support resistance alone can be a really profitable forex investing strategy, which is mostly used in long term trades. The same principles apply to short term trades (using 5 – 60 minutes time frame), only then there are many false forex signals.

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