Bab 2 How to Trade Support and Resistance in the Forex Market
Support and resistance are specific levels or zones on the trading chart, where the price of a Forex pair (or equity, commodity, etc.) is likely to find opposition. The reason for this is that these are psychological levels showing the different attitudes of the market players. In our case these are the bulls and the bears fighting for dominance in the market.
When price meets such levels it could lead to a bounce in the opposite direction of the trend or to consolidations (horizontal movement of the price). Also, the level could be broken and the price could make a rapid move.
What is the difference between a support and a resistance?
Supports are the levels which are beneath the current price, while resistances are the levels above. Furthermore, when price goes down through a support level and breaks it, this level becomes a new resistance and vice versa. In other words, when breaking the level in a bearish direction, price relocates under that level and the old support levels now becomes a new area of resistance. Have a look at the image below:
How to find support and resistance levels?
For the most part, support and resistance levels are very easy to find on the Forex charts. Every bottom on the chart is a potential support and every top is a potential resistance.
If we see the price dropping to a level and then going back up, we consider this area as an eventual point, where next time the market gets to that level, it might find opposition. If we see the price bouncing again from this level, then we confirm the level as a support. Then we assume that the price is likely to bounce off this support again in case of another drop. The same applies for resistance levels.
Not all support and resistance zones are created equal. We are only interested in trading valid supports and resistances as measured by their authenticity and potential.The more reliable support and
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