Many traders believe that support and resistance is only a zone from where price usually reverse. Yet, is it enough only to understand the basic concept of Support & Resistance? AtoZ Markets team has created this Support and Resistance trading Beginners guide, in order to explain to you more in-depth the concept of Support and resistance.
27th May, 2020, | AtoZ Markets – There are many various methods and ways to predict price movements of FX pairs, commodities or even cryptos. Among all the strategies and tools, Support and Resistance trading has become very popular in the Forex market. The cornerstone of support and resistance trading is based on what the big investors are doing in the market.
However, a trader needs to understand more than just the basics. Hence, our team has created this support & resistance trading beginner guide, wherein we will explain to you in-depth how to also use support and resistance in the charts.
The Basic Concept of Support and Resistance
The concept of support and resistance trading is the same for every market, whether it is Forex, Stock or Crypto trading.
In a regular Forex chart, we normally see these levels as a horizontal line or area from where the price is possibly likely to reverse. But a trader should ask himself why the level is so important and what makes the level to react as a potential reversal zone.
In a normal market, when we buy something, the price goes up as the demand increases. This is a basic economic term called Supply and Demand. Similarly, the price goes down when the supply increases. Therefore, a market looks like an image below:
It is pretty like a ranging market. But what happens to the sellers when we see a massive breakthrough above the sellers’ zone?
In every market, when a price breaks any important support or resistance level, it creates panic to the traders who make losses. For example, in the above-mentioned picture, we can see the panic of sellers at the question marked area. It was a happy ranging market, so buyers and sellers were able to make a profit by selling from high and buying from low. But in the end, price moves sharply above the sellers’ zone, creating panic to the sellers at that level. As traders make losses, they set it to their memory that they may face loss again if the price reaches that level. Hence, the level becomes important. Therefore, traders consider those levels as important support or resistance.
So, it is very important for a trader to understand the concept behind the support and resistance trading rather than believing it as a simple horizontal zone.
Support and Resistance in the Forex
The support level is a strong demand zone that has a strong demand to hold the price from falling any further. You can find support levels at the bottom of a price that gives a signal about the emerging new market. The support price is taken into account of the bottom price for a currency pair that pays an honest profit within the future.
On the opposite hand, Resistance is a price level that has a strong supply to stop the currency pair from moving higher. As the price rises and approaches resistance, sellers become more interested in selling and buyers become less willing to buy.
In the above image, we can see that the rising market was stopped by strong sellers in a particular area called the resistance. Therefore, the price started to move down and faced a potential supply zone called support. So, the price started to move up as buyers became more interested in that price level.
Beginners Guide to Support & Resistance
Support & Resistance is a crucial part of any type of technical analysis. Therefore, it is mandatory to understand the concept. In this support & resistance trading beginners guide, we will explain the other support & resistance basics before plotting it on MT4 or MT5 chart.
How Support and Resistance are Connected with Economy?
Some experts compare it with pure economics, comparing the support with demand and resistance with supply. It is best compared with supply and demand, which is an important part of the economy. Since supply and demand are the main facts that affect the profitability of a currency pair.
Forex market is the world’s biggest market that has nearly 5 trillion dollars transactions every day. Therefore, it is quite impossible to move the market by a couple of traders. Since, if we count all traders, brokers, investors besides corporations and Banks, this only adds up to ±3%. Therefore, big investors and major market movers analyze the economy and find the potential supply and demand zone for a particular currency pair. After that, when they enter the market, their movement reflects the price chart as support and resistance.
The Difficulty of Drawing Important Levels
It is often very difficult for traders to spot and draw the Support and Resistance levels flawlessly and elegantly. It takes many analysis & research to seek out the correct support and resistance zones. Therefore, there may be a big difference between successful traders and unsuccessful traders.
If you draw the road on every level, the entire chart is going to be filled with lions. Therefore, it’ll be almost impossible for you to work out the right support and resistance trading layers. A trader should know how to filter the correct levels in the chart. In that case, understanding the overall market context is the key. You need to have much knowledge about the volatility & non-volatile nature of a trend along with the market structure to read the big player’s movement in the price chart.
The major difference between winners and losers is that the right drawing of support and resistance level. Therefore a trader should not rely completely on candlesticks and support and resistance levels.
How to Find the Key Rejection Level?
As we have seen earlier, support and resistance levels are the levels that have potential buying or selling interests. To find a rejection from a support or resistance level, a traders’ duty is to find a reliable level.
It is true that we cannot identify any support or resistance level until it forms, but we can easily consider support and resistance level following the footsteps of Big players. After breaking any important support or resistance levels, price usually moves very sharply, but when it approaches the opposite side, the momentum starts to lose.
When price approaches any significant support level, tiny green candles appear and it starts to travel up (as indicated in the picture). This shows the entry of buyers within the market and it’s called the rejection. Rejection from support levels may show a confirmation that buyers have entered the market. Therefore, the likelihood of subsequent candles to travel green is higher. In this situation, any of your selling trade may end with the loss. That’s why rejection is so important to know.
The more the rejection, the stronger the extent it suggests because it recalls the memory of panic by the buyers or sellers. Once we enter the rejection area, we’ve to draw proper lines that include most of the rejections. The more rejection we get the upper is that the chance of profitability. However, when we draw rejection levels, very recent rejection is vital because the market tends to follow very recently junctions.
How New Traders Struggle with Support and Resistance?
New traders usually consider support and resistance levels as horizontal zones that move the price towards the opposite direction. Moreover, they also ignore how to read the chart to understand what the big players are doing in the market.
- New investors don’t emphasize the importance to draw support and resistance lines. Additionally, some peoples are lazy in nature, so learning something new and subjective. So new traders should invest time in practice before moving with the real money.
- Finding good support and resistance level may be a mechanical task that requires solid knowledge about supply and demand theory. Therefore, new traders might find it hard to understand, so they consider every level as potential support and resistance levels. Consequently, new traders should consider the right levels by observing how the price approaches the level.
- We call it Support when the price stops from a downward movement and from there, it starts to rise. Support is viewed because the base from which starts to extend. So, we see price reversals when the movement already happens. But new traders become confused to find the right level as all support levels do not reverse the price.
- On the opposite hand, Resistance may be a price level where growing price stops and creates a roof towards the sellers’ side. But there might be several resistances and new traders struggle to pick the right levels that have the highest probability to reverse the price. So you should monitor the history of the level to know how traders reacted to that price to find the right level.
In the support & resistance trading beginner guide, we saw that the support and resistance are dynamic. Therefore, your trading decisions based on them must even be dynamic.
Mark major support and resistance levels on your chart, as they might become relevant again if the worth approach those areas. Delete them once they’re not relevant.
Also mark the present and relevant minor support and resistance levels on your chart. These will assist you in analyzing the present trends, ranges, and chart patterns.
Make sure to follow strong money management for your every trade. Additionally, you should have good trading psychology that will help you to make the trading decision bias fee.
Think we missed something? Let us know in the comments section below.