In Forex trading, understanding support and resistance is crucial to identifying where price is likely to pause, reverse, or continue its direction. These levels act as psychological barriers in the market, helping traders make more informed decisions. In this article, we’ll break down what support and resistance are, how they work, and how you can use them to improve your trading strategy.

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What is Support and Resistance?

Support and resistance are key concepts that describe the price levels where the market tends to find barriers.

• Support is the price level at which a currency pair is considered “cheap” and is likely to attract buyers. In simple terms, it’s the level where demand for the currency increases, preventing the price from falling further.
• Resistance is the price level at which a currency pair is considered “expensive” and faces selling pressure. At this point, supply exceeds demand, causing the price to struggle in breaking above this level.

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How Support and Resistance Work in Forex Trading

Let’s take a look at an example to understand how support and resistance work in practice.

In the case of the Australian Dollar (AUD), we observe that the price tends to find buying interest around the 7150 level, where it meets support. At the 7250 level, the pair faces resistance as strong selling interest emerges, preventing the price from climbing higher. You’ll notice that the price has spiked above the 7250 resistance multiple times, but it consistently fails to close above it.

When the price breaks below 7150 support, the market shifts, and the former support level now acts as a new point of resistance. This is a very common occurrence in Forex trading: levels that previously acted as support (where buying interest was high) tend to become resistance (attracting selling pressure) after they break down—and vice versa.

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The Power of “Buy Low, Sell High”

You’ve probably heard the old saying, “Buy low, sell high.” This is exactly what Forex traders look to do: buy into support and sell into resistance. These strategies provide traders with:

• Higher probability setups: Buying at support and selling at resistance statistically offers better chances of success.
• Tighter stop-loss levels: Because support and resistance levels act as clear barriers, traders can place stop-loss orders just beyond these levels, reducing risk.
• Larger profit potential: By trading near support and resistance levels, traders give themselves plenty of room for profitable trades.

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Horizontal Support and Resistance

Horizontal support and resistance levels are the most straightforward to identify and trade. When price tests these levels multiple times but fails to break through, traders begin to see them as significant price barriers.

Take the example of the USDJPY chart from September 2012 to January 2016. The trend line forming support has consistently attracted buying interest whenever the price approaches it. This trend line acted as a major support level over the years.

Similarly, for the GBPUSD currency pair, notice that when price reaches trend line resistance, it consistently struggles to break above it. Each time the price touches this level, it falls back, confirming the strength of resistance and leading to a further downward movement.

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Trend Support and Resistance

Trendlines are another powerful form of support and resistance. Unlike horizontal levels, trend support and trend resistance are dynamic, slanting with the prevailing trend direction.

• Trend Support: This is the line connecting the lows in an uptrend. Price tends to find buying interest when it approaches this line, offering traders the chance to enter long positions as the trend continues upward.
• Trend Resistance: Conversely, trend resistance is drawn by connecting the highs in a downtrend. When price approaches this resistance level, selling interest increases, and the price often reverses lower.

In the case of GBPUSD, the recent downtrend has seen price struggle to close above the trend line resistance. Eventually, the pair turns lower, confirming the validity of the trend resistance and leading to a further price decline.

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Key Takeaways

To trade effectively with support and resistance, keep these key principles in mind:

1. Identify Key Levels: Use horizontal support/resistance or trendlines to mark critical levels on your chart.
2. Wait for Confirmation: Enter trades when price breaks and closes beyond support or resistance levels. A breakout or reversal provides a confirmation signal.
3. Set Tight Stops: Place your stop-loss orders just beyond the support or resistance levels, ensuring minimal risk while maximizing your reward potential.
4. Trade in the Direction of the Trend: If you’re trading in a trending market, look for opportunities to buy near support during uptrends and sell near resistance during downtrends.

Support and resistance are essential concepts for every Forex trader. By identifying and understanding these key price levels, you can make informed decisions, spot high-probability setups, and enter trades with clear entry and exit points. Whether you’re trading horizontal levels or trendlines, always remember the fundamental rule: buy low, sell high.

Start practising these concepts with a demo account, and get ready to improve your trading with clear, reliable price levels.