What is and How to Draw Support and Resistance Forex Trading
Support and resistance are one of the most widely used concepts in trading. Strangely, everyone seems to have their own ideas about how you should measure support and resistance.
In each trading session, the prices of trading instruments will certainly change. Either up or down, these prices will then form patterns of peak highs and lows that are difficult to pass on the next price movement. These peaks are hereinafter known as support and resistance points.
Explanation Support and Resistance
The lowest price point that survives and does not pass for a while is known as support. While the highest point of price movements in a session that has not been passed is called resistance. In the chart, resistance and support can be described as lines that limit price movements.
Then, what are the benefits of knowing the support and resistance points of an instrument's price movements? The answer is that these two points provide a benchmark range of possible price movements in a trading session. By utilizing these two points, you can find out a rough picture of the price position and possible direction of further movement.
Look at the picture above. As you can see, the zigzag pattern shows an upward trend (bull market). When the market moves up and then back again, the highest point reached before returning now is resistance. Learn too What is a Trend in Forex Trading
With the market continuing to rise, the lowest point before starting to rise again now is resistance. Support and resistance are continuously formed as long as the market oscillates up and down from time to time. And also vice versa for the market down (down trend).
How to Draw Support and Resistance
One thing to remember is that Support and Resistance are not exact numbers.
Often you will see translucent Support and Resistance, but soon after knowing that the market is only testing it. With candle charts, the "test" Support and Resistance is usually represented by candle shadows.
Notice how the shadow of the candle tests the 1.4700 support. At that time the market seemed to "break" support. But after that, we can see that the market is just testing that level.
So how do we really know whether Support and Resistance are translucent?
There is no definitive answer to this question. Some have argued that Support and Resistance break through if the market can really go beyond that level. However, you will find that this does not always happen.
Let's take our same example from the example above and see what happens. When the price really closed at 1.4700 support.
In this case, the price has closed below the support level of 1.4700 but eventually rises back above it. If you believe that you have broken and sell this pair, you must be mistaken! Looking at the table now, you can visually see and come to the conclusion that supports that support has not been broken yet, but is still very influential and is now stronger.
To help you filter out these fake breakouts, you should think of support and resistance as "zones" rather than numbers. One way to help you find this zone is to draw support and resistance on a line chart rather than a candle chart. The reason is that the line chart only shows the closing price while the candle adds the highest and lowest prices.
These ups and downs can be misleading because often they are just a "shit" of market reaction. It's like when someone does something very strange, but when asked about it, he just replies, "Sorry, it's just a reflex." When drawing support and resistance, you don't want reflexes from the market. You only want to draw intentional movements.
Looking at the line chart, you draw support and resistance lines around the area where you can see prices forming several peaks or valleys.
Other interesting things about support and resistance:
- If the price passes the resistance, that resistance can be a potential support.
- The more often the price tests the support / resistance without breaking, the stronger the support and resistance area.
- When support and resistance levels are broken, the strength of the movement depends on how strong the support or resistance has held.
With a little practice, you will be able to see potential support and resistance easily and be consistent forex trader. Read about 10 Tips Profit Consistent in Forex Trading
Trade with Support & Resistance
For example, because support is the lowest point in a price movement, when the price is near that point, it is likely that the next price will experience a strengthening. Thus, it can be a technical indicator to open long positions.
Conversely, when prices are at the point of resistance, there is a possibility that prices will reverse and fall back. So, you can use the moment to open short positions.
Breakout & False Breakout
However, you also need to be aware of the breakout or false breakout at the points of support and resistance that have lasted long enough. Breakout Is an event where the price finally moves through an existing support or resistance point and continues to reach a new support and resistance point.
While false breakout applies vice versa. When other technical indicators show signals of a breakout, sometimes, the price actually reverses and moves in the opposite direction suddenly. This indicates that price movements and emerging market sentiments are not strong enough to break through existing points and create new support and resistance prices.
That way, to be able to take advantage of support and resistance points in your trading, you also need to integrate it with various other technical indicators such as MACD and RSI.
Integrating Support & Resistance with Other Indicators
For example, when prices approach the resistance point, there are two possibilities that may occur, namely the price will experience a breakout or reversal and fall back. Both of these can be distinguished by observing the RSI and MACD indicators.
If the MACD chart still shows a positive trend then most likely a breakout will occur. Likewise, RSI. When the price approaches the resistance point but the chart still does not pass the saturation point at 70%, a breakout is likely.
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