Forex Support and Resistance
Support and resistance is a concept that many Forex traders use to determine when to enter and exit a trade. This is a principle that goes hand-in-hand with technical analysis for Forex traders. Here are the basics of support and resistance and how you can use it.
How it Works
When you look at Forex charts, you can often see levels at which the price reached a certain point and then bounced back down again. This also happens in reverse when a certain low is achieved and then the price goes back the other way.
The level at which the price changes directions is known as a support or resistance level. For example, if the price goes down to 1.3425 and then always comes back up, you could say that 1.3425 was a support level for that particular currency pair.
Traders often use these levels to determine when to get into and out of the market. For example, when a currency pair is trading at a certain level, the trader will look at these levels to determine if he should place a trade. If the price is moving up and it is a long way from the next level of resistance, he might decide to go ahead and get into the market.
At the same time, you can use the next resistance level as a place to set his take profit number. This way, he can avoid watching the price move up and then stop shortly before retracing. He can also set a stop loss below the nearest support level.
To break through a level, a large amount of momentum must be present in the market. When a trader sees the price of a currency pair breaking one of these levels, it is often an indicator that the price of the currency pair will continue to move in that direction. If the trader is diligent, he can often catch a big swing in the market and bank some serious pips.
The Fibonacci sequence is an order of numbers that has been used in many areas of life and math. In the Forex market, it is used to help calculate levels of support and resistance. For those who do not know, the Fibonacci sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144... You get these numbers by adding the first to together to get the third. Then adding the next two together to get the fourth, and so on.
In the Forex market, you can compare the ratio of one number to another to get support and resistance levels. For example, if you compare one number to the next higher number, the ratio is .618. If you use alternate numbers the ratio is .382. By calculating these ratios, you can get points to put on the chart.
In reality, you'll never have to calculate any of this in Forex trading. You can simply use your trading platform to do it for you. You simply select "Fibonacci" in the Forex indicators section of your trading platform and it will be plotted on the chart.
Putting it Together
This seems to be a valid concept that many traders used in the Forex market. While it is not 100% foolproof, it does have some merit. Play around with support and resistance levels on a demo account to see what I'm talking about and you will get an idea of how you could use it to be profitable.
Return From Support and Resistance to Forex Charts
Return From Support and Resistance to Forex Trading