If you’re a beginner in the forex market, the first thing you should practice in technical analysis is to find support and resistance levels. The support and resistance are used to analyze the market and identify potential reversal zones. When you find a support or resistance zone, that zone can be very important to decide where the price will move next.
To find support or resistance zones in the fx market, can be easy. But trading them can not work out always as the support or resistance zones can not always as you expect. And to explain when support or resistance occurs in forex trading we will show some examples.
How to find and trade support zones
In the image below we have a 4-hour time frame chart that shows a major support level at 139.438. The support level is very strong that sellers weren’t able to break that support. The reason for that is because the momentum of buyers in the market at that level created a strong support line where buyers (bulls) were prepared to buy.
The market tested that support zones 3 times but couldn’t break it. And you can see that when the market tested the key support zone for the 3rd time, couldn’t break it. So it moved up for more than 100 pips and tested the previous resistance zone that was created at the 140.800 level.
And you as a trader during these situations you could use the opportunity to buy when the price doesn’t break a key support zone as this example shows. The entry price with a buy order should have been near the support at 139.438.
But remember that if you trade every support or resistance zone, you won’t succeed always. This requires other factors, and a combination of support zones with market patterns such as double top, double bottom, or a combination with trendlines, will give a higher success ratio of trades.
How to find and trade resistance zones
In resistance zones, if resistance price breaks or not is decisive in the next movement. And in this example, we have an example of a horizontal line. On the chart example below, we have a double top pattern, and on the top of the pattern, the price has created a horizontal line (resistance).
The price created the resistance zone after it found the momentum of sellers in the market. And the price went down for some pips but created a support zone at the 1487.71 price level. Then, the price moved to retest the resistance zone at 1513.91 price level and couldn’t break it.
After the retest completed, at the resistance finished, the retest on the support began now. The price tested the support zone where buyers are trying to buy. But the sellers were able to break the support zone and driving the price further down.
Here’s what happened when the support was broken. After the sellers broke the support and the buyers weren’t able to overcome the momentum of sellers, the price went down. But you can see that when support was broken, the price moved for some pips up. That’s called retest, as the price retested the support zone but continued down to fall.
Based on this example, you could have used this opportunity to open the buy order at 1487.71. As the support couldn’t break, you could have placed take profit at 1513.91, and it would give you a profit of more than 250 pips. Or you ou could have traded by opening a sell order when the price couldn’t break the first resistance zone at 1513.91.
Or you ou could have traded with a sell order too. When the price couldn’t break the first resistance zone at 1513.91, a sell order with a take profit at the support zone 1487.71, would give you again more than 250 pips.
Identifying support or resistance levels in charts, it’s important as they can be one of the major points to determine where the price will go next. However, not all support and resistance work always, as there can be takeout and breakout that can touch your stop loss.
And this can affect your trading, so the suggested approach to trade them is to combine support and resistance zones with price action (market chart patterns, trend line, etc). Because when you trade with many confirmations of your analysis, your analysis and forex trading strategy will have more success.
Support and resistance trading can be more successful when you spot them in higher time frames. Some of the time frames that can give you a stronger analysis of the foreign exchange market are hourly chart, daily chart, weekly chart, or monthly chart. There are scenarios where you can trade with only support and resistance zones, but finding more confirmations to analyze the market can result in a higher success of trades.
The examples we give on our blog are based on our analysis. But you as a trader should always trade according to your analysis.