One of the most widely and popularly used concept in the world of forex trading is that support and resistance. But, most of the people have very vague ideas regarding what the concept really is and how it can be used for the purpose of market analysis. This article is aimed at explaining to you in simple terms the concept of support and resistance and how it can be used to find out the best time to enter or exit the market.
Let us take an example to illustrate these concepts one by one. Suppose the market is moving in a zigzag manner. Now, in such a case when the market keeps going up and then pulls back down all of a sudden, then the highest point that is reached before the pull back starts is known as the market resistance. In the same manner if the market is falling down and it suddenly starts to pull back up then the lowest point that is hit before the pull back is called the support.
Let us now see how these concepts of support and resistance can be applied in real life and how can they help you in the currency market. The first thing that needs to be remembered before plotting these support and resistance levels is that they are never exact. This means that there can be times when you might believe that the support and resistance have been breached only to find out that they have not been breached and the market was just in a transitionary phase. Support and resistance can generally be plotted using candlestick charts and historical data.
The main area of concern with regards to these concepts is finding out when these levels have been breached. In case of candlestick charts, candlestick shadows are used to determine support and resistance level and their permeance. Generally traders often argue with regards to when a break is actually there in these levels and when the market is just resting (in transition). There are some people who believe that resistance is broken only when a market closes above a point while there are others who argue this point.
The best way to determine whether there has been break in the support or resistance level is by taking these levels as zones rather than distinct numbers. These zones can be identified by plotting line charts instead of candlestick ones. Once these zones have been plotted all you need to remember is that in case the price is in any one of the zones, the market is just resting and there may be a chance that a break might occur but it is not necessary.
The concept of support and resistance is quite crucial when it comes to forex trading. This is due to the fact that it can help you determine the best time to enter or exit the market. So what needs to be done is ensure that you understand these concepts completely and use them with care while trading in the currency market.