Importance of support and resistance

One of the most frequently mentioned words in forex trading is support and resistance.
This is because they are important levels that give signals on the next price moves. Whether you’re trading forex, CFDs or commodities, it is important to know where support and resistance sit.

Looking for support and resistance levels

Support and resistance levels can be tricky to view on a chart when starting out, but over time, they become second nature. After viewing a few charts, you will be able to spot support and resistance levels with ease.
Let’s look at two charts highlighting these key levels.


In this chart, you can see that price has bounced back for several times when it hit the support level.
This means traders are supporting the price move at this level and not letting it go lower. This is when a support level is established. If this level is tested several times, it is more likely to hold.



On the other hand, this chart shows the resistance level. This means traders are not pushing this price any higher than this level, that’s why it is called resistance.
It means any attempt to try to go higher is being met with strong resistance.

Why is support and resistance important for your trading?                     

It is important to know where support and resistance levels are because they signal trader sentiment.
If traders are bullish and able to break through a resistance level, prices will escalate quickly.
However, despite some bullish sentiment at times, traders are also wary when prices go near the resistance level because it could mean prices will be rejected and go lower.
On the flip side, if traders are bearish, a break of a key support level will trigger a number of stops and see the price fall quickly.

Psychology behind support and resistance

From a technical analysis point of view, support and resistance levels tell a lot about traders’ psychology. Here are three most common interpretations of support and resistance levels.

• Length of time or frequency – the longer a price stays on a certain support or resistance level, the more important and stronger that level gets.

For example, in the chart below, the Aussie dollar was trading on a tight range between .75 – .77 cents. And whenever the price moved to .77 cents or just above it the sellers stepped in and drove the price lower.


This price action went on for several months, indicating that.77 cents was a key resistance level for the Aussie dollar.
From the trading psychology’s point of view, this means traders are willing to support the Aussie dollar but only up to a certain level – in this case at .77 cents. Anything over 0.77 and traders felt the Aussie Dollar was overvalued and expensive.

• Trading volume at key levels –heavy trading volume at a support or resistance level will indicate the importance of that level.

Many technical traders use the combination of volume and support and resistance levels as indicators or signposts.
For example, if there’s heavy trading volume on a support level, this could mean the bullish traders are willing to buy at that price. On the other hand, there must be the bearish traders on the other side trying to pull the price down.

• Switching of roles – while support and resistance levels can be solid and defined at times, there are also instances they will swap roles.

This will happen when a previous support level is breached. Once breached, prices often attempt to rally back to the previous support, turning it into a new resistance level.
The same is true with a resistance level that has been breached and then turns into a new support level.
Both of these scenarios mean trader sentiment has reversed. As a trader it is best you take note of the change in sentiment as it could drive the next direction in price.

By Royal

Source: http://www.rfxt.com/blog/index.php/2017/07/26/importance-support-resistance-trading-fx/