Support and Resistance

There is a deep-seated misconception among newbie forex traders that when a market is moving in a certain direction it will move so in a perpendicular angle, I know this cos that’s how I thought so too initially but in reality the market moves in zig zags whether going long or short. As a trader you need to learn and identify these changes as they are very crucial in making you a successful trader. These zig zag patterns are identified as support, resistance levels, higher highs, higher lows (uptrend), lower highs and lower lows (downtrend).

So what is support and resistance? When the market is in an uptrend and the market pulls back, the highest point reached before a pull back is called resistance (see image below). When the market pulls back, the lowest point reached before the market starts going up again is support. In an upward trend resistance is also referred to as a higher high and support as a higher low.

The same principle applies in a downtrend as can be seen on the below image.

As a trader you also need to keep in mind that the forex market can be very undecided. This effectively means that somethimes you will have a trend that is in midrange, sideways or ranging trend, neither showing a decisive upward or downward trend as seen on the image below.

This is where you will find out that when there is a breakout, whether it’s an upward trend or downtrend, resistance will become support (uptrend) and support becomes resistance (downtrend).

What you need to keep in mind is that support and resistance are not exact numbers. This is because in most instances you will see support or resistance that has been broken only to find out on later analysis that it was just a market reflex. If your analysis is done with candlestick patterns this is reflected by candlestick shadows, commonly known as wicks.

This is further emphasized by the above image where the price closed below 1.4700 but eventually rose back up again above the support. So if you had believed this was a break out and had sold the pair you would have been on a losing trade.

To help in filtering out this false breaks you need to look at support and resistance as zones rather than concrete numbers. One way to do this is to chart support and resistance in a line chart rather than a candlestick chart. The reason behind this is that charts show the closing price whereas candlesticks add extreme highs and lows to the picture.


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