Technical analysis “a-b-c” starts with support and resistance Forex traders use. From basic concepts to advanced techniques, support and resistance levels give an idea about when to jump into or out of a trade.
There’s more to money than many people think. Most of us must have it for various reasons. Mainly, to fill what we need to pay out. Making and spending money became one of the most important ways to connect with each other.
While anyone knows how to spend it, the problems appear on the earning side. How much is too much? What makes money so important that everyone wants more and more and more?
Moreover, what can regular Joe do about it? Online retail trading might be the right answer.
Mind the word “mind” in the paragraph above. While online trading looks easy, the reality tells a different story.
Statistically, almost all retail traders lose their first deposit. This happens for various reasons:
- They overtrade
- They know nothing about the Forex market
- Traders have unrealistic expectations
- They simply do not fit the trading world.
Buying or selling of a currency pair comes at the end of a due diligence process. Traders must have an idea why they want to go short or long.
Various types of analysis help. Take fundamental analysis, for example. Traders interpret economic news to form an educated guess about the state of the economy.
With that in mind, they sell or buy a currency pair thinking of what the central bank will do with the interest rates.
On the technical side, traders use one or more trading strategies. The resulting trade has an entry and an exit place. This article aims to show different support and resistance Forex levels using various techniques.
Defining Support and Resistance Levels
As part of the technical analysis, support and resistance concepts were widely used in the past. Nowadays, support and resistance Forex levels are even more popular.
Since technical analysis appeared in the Western world, the support and resistance concept formed the basis of it. Together with classical shapes like head and shoulders, rising and falling wedges, double and triple tops, etc., resistance and support levels shaped the way technical analysis started.
Support and resistance trading is a very simple concept. Traders buy when the price is at support and sell when the price meets resistance.
However, while it looks simple, day to day technical analysis leaves room for error. Moreover, the time frame used plays an important role.
As a rule of thumb, no matter the technique used to identify support and resistance levels, look at the time frame. The bigger the time frame is, the stronger the levels are.
Moreover, every trader must know the following: any support and resistance level broken, changes its nature when retested. In plain English, a Forex support becomes Forex resistance. And the other way around too.
Classic Support and Resistance Forex Levels
Support and resistance come in two shapes: classic and dynamic. A simple definition of a classic support and resistance level states that it forms on the horizontal.
Any technical trader knows that. The market hesitates most of the times at such levels.
Looking at a chart, you’ll notice price falling like a rock. Suddenly, it stops, and consolidation starts. That was a strong support.
The chart above shows the AUDUSD weekly time frame. When it traded around the 0.90 level, the former RBA (Reserve Bank of Australia) Governor talked it down.
In a newspaper interview, he mentioned the strong AUD. A fair value, Mr. Stevens said, would be around seventy cents on a U.S. dollar.
The market got the message. It started to sell AUD in a frenzy. The AUDUSD was, of course, the favorite pair to do that.
When it reached the 0.77 area, it consolidated for about four months. Only after, it moved lower.
However, that consolidation area was enough for the previous support Forex traders saw. The moment the support area broke, it transformed in resistance.
In a way, we can say the area between 0.77 and 0.78 acted like a resistance and support line. Since the second quarter in 2015, the price still struggles with it.
This area shows classical support and resistance. Until the price breaks this Forex resistance and support area, ranges will dominate the AUDUSD pair.
Yet, the market leaves some trails. Look at the series of higher lows it made. It tells us the pressure to break the resistance Forex level builds up.
One way to trade a support and resistance Forex level like this is to place a buy stop pending order. When the 0.78 breaks, go with the flow. You’ll end up buying strength.
Dynamic Support and Resistance Forex Levels
The AUDUSD example above came from the weekly chart. As such, the support resistance levels there have more weight than levels on lower time frames.
Moving forward, support resistance trading around such levels don’t form only on the horizontal. Moreover, when they don’t, they’re even more difficult to break.
As such, they offer great trading opportunities. Any support and resistance Forex level that doesn’t form on the horizontal is a dynamic level.
The EURUSD chart below shows a great support and resistance Forex trading strategy. It shows the weekly time frame.
When the pair traded around the 1.40 level, the ECB (European Central Bank) announced future rate cuts. Moreover, it sounded extremely dovish. It hinted towards quantitative easing.
Euro bears didn’t waste time. An almost vertical move started.
Any support and resistance line needs two points. When the line gets tested in the future, price meets support and resistance. This is basic technical analysis.
Dynamic levels show imply strong bounces. This was the case with the EURUSD above.
The analysis starts from the left side of the chart. The two points for the main trend line give the bearish angle.
A strong dynamic support level appears. Even if the market made a new low. This is what dynamic means.
The next thing is to copy and project the main trend line on the opposite highest point. The resulting support and resistance Forex channel show the main trend.
The price breaks it and then retests the channel. The dynamic resistance offers a great place to go long for the next months or so. When the channel broke, the market signaled bulls started to take over.
How to Trade Support and Resistance – Examples
Patterns represent the bread and butter in the technical analysis field. No matter the trading theory used, one way or another, traders use patterns.
This is great because they give a set of rules. And, traders follow these rules to trade the same way every time a pattern appears.
Believe it or not, support and resistance trading uses patterns all the time. The way to build a bullish or bearish channel shows the way to look for a pattern. And so on.
We won’t use any support resistance indicator in this article. For this, simply open any trading platform you want.
Then, go to trend indicators and choose any one of them. They mainly show places to add in a trend. Hence, in a bullish trend, when the price comes to the indicator (a.k.a. support), traders go long.
Furthermore, any oscillator is a great support and resistance indicator mt4 traders use.
But both trend indicators and oscillators pale in comparison with the methods shown here. Understanding classic and dynamic support and resistance Forex levels pay more on the long run.
In this part of the article, we’ll discuss two USDCAD examples. Both deal with recent price action on the pair and have a clear and sound support and resistance trading strategy.
It all started when the oil price hit the magical $30/barrel one and a half years ago…
Because the Canadian economy is an energy-driven one, the CAD reacts like this to oil price changes. Therefore, the USDCAD dropped from above 1.46.
Elliott Waves Theory – Great Support and Resistance Indicator
Few know that the Elliott Waves Theory has an amazing channeling component. Remember the pattern recognition approach mentioned earlier?
It works like a charm with the Elliott Waves Theory. In fact, the whole theory consists of the same patterns endlessly repeating.
Because the theory has numerous rules to follow, these rules give the way to construct the patterns. In our case, some of these rules give a powerful support and resistance strategy.
Coming back to the oil price, when it bottomed, the USDCAD pair topped. The CAD and oil prices enjoy a direct correlation.
However, in doing that, the price left some “trails”. While there’s no numbers or letters on the daily chart above, the support and resistance trading plan comes from Elliott rules.
Elliott found that in a double or triple zigzag like this one, the first thing to do is to establish the upper trend line. Simply connect the two points that make sense for the trend.
In Elliott terms, this is the so-called b-b trend line. Next, project it from the end of the first swing lower. When price meets the resulting trend line, it meets support.
While it doesn’t seem like much, think of the time frame. This is daily. Hence, for intraday trading, knowing the price will bounce works like magic.
Support and resistance Forex strategies result from these bullish or bearish channels. When the price breaks out, the trend ends. As simple as that.
In this case, the fall in the USDCAD pair within the two support and resistance lines happened when oil bounced. And then a long consolidation period started.
However, this was no classical consolidation. It had a rising angle. As such, dynamic support and resistance principles could be used.
How to Draw Support and Resistance Lines
What followed is the perfect example for resistance and support Forex traders. Everyone knows how to trade after the levels appear. But, how to draw support and resistance trend lines?
Here’s how. The USDCAD daily chart below shows how support resistance trading around trend lines takes place.
A rising trend started after the price broke out of the previous bearish channel. The thin blue line shows the rising channel.
The line connects two points. The next step is to copy and project the rising trend line from the point no. 1 in the chart above.
Support and resistance Forex levels follow the rising channel. However, not long, the trend line breaks.
Yet, price action fails to break the higher lows series. The pair still enjoys a bullish price action. As such, we can draw new support and resistance levels.
The new support and resistance Forex channel starts with the thick blue line. It connects the previous lows with the new higher low the market made.
Therefore, we have a new rising trend line. If we project the new trend line from the same point no. 1 in the chart above, we end up having an educated guess about future Forex resistance and support. In this example, future resistance Forex traders saw ahead of the time.
Selling at no. 3 represented the perfect entry. However, the price recently broke the main trend line.
The same principle explained above applies now. Unless the price breaks the lows in point no. 2, the series of higher lows survives. Bulls still rule price action.
As such, traders will adapt the analysis and build a new trend line. Projecting it from point no. 1 again, gives the perfect place to sell again.
The Perfect Support and Resistance Strategy
Many traders look for the holy grail in trading. You know, the perfect solution.
When sailing, the perfect storm is every sailor’s nightmare. The same in trading, but the other way around. The perfect solution is every trader’s dream.
The idea is to find a support and resistance area because of a confluence of factors. Namely, multiple indicators/systems/trend lines/patterns to show the same thing.
Such a support and resistance Forex level gives confidence in the trade. Normally, traders adjust their position size based on the probability of a trade to reach the target.
We all know not all trades have the same chances. That’s trading.
However, “when the stars align” for the perfect trade, aggressive traders take the plunge. Multiple resistance and support levels in the same area give confidence.
The black horizontal line above shows the 1.40 level on the EURUSD pair. The same level before the ECB turned dovish.
Firstly, the round numbers have a psychological component. A simple Forex support and resistance strategy is to look for a reaction around them.
Traders tend to place take profit or stop loss orders at round numbers. Hence, we have the first bearish clue.
Secondly, the EURUSD formed a rising wedge. The lower and upper trend lines (the blue ones) acted as support resistance Forex levels. Until price broke lower. The second bearish sign formed.
Moreover, the rising Pitchfork is a great support and resistance indicator. Until price stays within the rising Pitchfork, bulls control price action. After that, the trend falters. The price hesitated while still inside the rising wedge.
Finally, the pair formed a double top around the psychological 1.40 level. Four bearish support and resistance strategies screaming for the same outcome: SHORT THE EURUSD!
The perfect storm hit bulls.
Bounce from a Resistance Level – Video Example
Now I will introduce you a video of a trade that I recorded. The trade is in bearish direction and I took it as a result of a bounce from a resistance level. The best thing of the trade is that I had an idea of the exact target before taking the trade. For this reason, the video illustrates a very well managed trade. And you can see that video absolutely for FREE. Simply enter your details to play the video.
Confluence support and resistance Forex areas do not form often. In fact, rarely such a scenario like the one above happens.
The price collapsed almost four-thousand pips in the next twelve months. How about that for a trade!
In fact, the currency market moves sideways most of the time. Even on the bigger time frames.
Including this move lower. I wouldn’t be surprised for this drop to be part of a corrective wave of a bigger degree. Like Elliott said, a bigger cycle formed elsewhere.
Yet, it represents the perfect answer to “what is support and resistance” question everyone asks. While you can find plenty of theoretical answers, you’ll have a hard time finding good examples.
Don’t be fooled into thinking the trade above was awesome. In fact, it was! But, only if you let the profits run.
I can guarantee you here that 99% or more of the retail traders would not let the profits run for four thousand pips. Do you know why?
Because greed and fear make traders weak. Comes Friday evening, and you’ll fear the Monday’s opening will wipe out your profit.
After all, there’s a saying when trading: take what the market gives you. That’s not trading.
The way to go is to trail your stop to the previous lower high swing.
Until the lower high series holds, the trend keeps running. Then let it do the job and simply follow it.
To sum up, support and resistance levels form on all time frames. From lower to bigger time frames, traders use them to buy or sell a currency pair.
However, profitable traders use them to identify a reversal. Based on that, they ride the new trend until completion.
Can you do that? If yes, you’re a trader. Welcome to the club!
START LEARNING FOREX TODAY!
- Forex resistance
- Forex Support
- resistance bounce
- Support and Resistance trading
- Support Bounce
- Support breakout