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SUPPORT & RESISTANCE LEVELS



Have you ever stared at a chart and wondered “Is it a good time to enter the EURUSD market?” 

So did we! And ‘Support & Resistance Levels’ can help you answer that!
Support & resistance levels are widely used terms in Forex trading. They represent points in the charts where the price movement shifts direction and majority of traders in the market react accordingly.

The moment when the price moves up, and then pulls back, that high point is called resistance. Because it is expected that the market will resist to break this level again when the price increases.

As the market continues up again, the lowest point reached before it bounces back is called support.

Resistance and support continuously form one after another until the market closes. In truth, these are imaginary barriers. And the reason that it works is the market sentiment: every trader believes these are good spots to enter the market and thus they magically turn into resistance and support levels!

One thing to remember is that support and resistance levels are not exact numbers.

But here is the tricky part: sometimes support or resistance levels appear to be broken, then you realize the market was just testing it. And then it quickly recovers back and maintains the support/resistance. Candlestick charts visualize them as shadows: thin lines sticking out of top and bottom points of candles. Therefore it is advised to consider resistance and support as ‘zones’, rather than points.

Note: Sometimes when price breaks through a resistance, that resistance might become the new support. The stronger the resistance/support is, the further the follow-through price moves.


Trading the support and the resistance 

There are two methods to profit from support/resistance levels on charts. They are called the Bounce and the Break. Let’s take a look at them both. 

The Bounce is waiting for the price to push these levels and turn around. Because it is risky to simply assume that the resistance and support will hold. 

You want to wait and see some sort of confirmation that the support or resistance will hold.


Likewise, if you want to go short, you should wait for the price to bounce off the resistance level before entering the market. Adding Stop-Loss mechanism to your Entry Order will help minimize the risk.

The Break approach, as the name suggests, means that you expect the price to break through the resistance/support and you are prepared for it. At that point you might either go aggressive or patient. 

An aggressive path means buying or selling right after the break, only if you are fairly certain that this is an actual break and not just a market test. A good tip would be to try and detect the price momentum. 

On the other hand, a patient approach is simply waiting to see what will happen next. Is it a passive approach? Yes. But is it less emotional and more rational? Also yes. Afterall, even if the price is moving against you and you are watching your equity torn to shreds before your eyes, patience is a virtue. Especially so for Forex traders… Because closing your position at this point is surrendering to the other side in our ‘tug of war’. 

That being said, there is absolutely no guarantee of a bounce back when it comes to Forex trading. It is quite usual for the price to break through a barrier and just… keep moving. 

The moral of the story is, stop-loss order is your friend and it will save you a world of headache.
 

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