The term support and resistance (SNR) is fairly popular in the world of forex trading. It is one of the most frequently used techniques in technical analysis. Without it, traders will experience difficulties and even losses in carrying out trading activities.
Indeed, how much impact and benefit can traders experience with support or resistance. Then, how to apply and how to use it to maximize profit potential in forex trading?
It’s time for you to find an easy way to determine support and resistance with simple indicators which will be explained in full below.
What are Support and Resistance?
In simple terms, support and resistance are likened to the two attributes that are most widely discussed in the analysis where support is a level that has the potential to withstand price declines.
Meanwhile, resistance is a level area that has the potential to hold back price increases. These levels are used to determine whether the price will continue or reverse direction.
Basically, Support and Resistance aims to find out the right area when taking a buy or sell position and determine the target of price movement.
In general, the support area is the area that is used as a reference to find a buy position, while the resistance area is used as a reference to find a short position.
Differences in the Focus of Support and Resistance
Basically, SNR aims to find out the right area when taking a buy or sell position and determine the target of the price movement.
In general, the support area is the area that is used as a reference to find a buy position, while the resistance area is used as a reference to find a short position.
Support
- Levels that have the potential to withstand price declines
- As a reference area to find buy positions
Resistance
- Levels that have the potential to withstand price increases
- As a reference area to find short positions
Therefore, support and resistance can be combined in the form of a candlestick which is believed to determine the next movement.
Support Principle
Economic support can be interpreted as a level where supply begins to decrease and demand increases so that if this happens, prices will rise at that level.
In principle, if the market price manages to penetrate the support level, it is estimated that the market price will continue its decline until the next support level.
However, if the market price is unable to penetrate that level, it is certain that the market price will reverse direction. The support level that has been broken can become a resistance level and pressure the market price to keep going up.
Resistance Principle
Meanwhile, economic resistance can be interpreted as a level where supply exceeds the maximum limit and demand has begun to decrease, so market prices will fall at that level.
If the market price manages to rise and penetrate the resistance level, it is estimated that the market price will continue to rise to the next level. The level that has been broken will become support and can hold the market down past that level.
How to determine the correct support and resistance?
Support and resistance are not quite understood in theory, but you need to take advantage of the help of technical indicators or certain price movement mapping methods. What are the methods?
The highest point (top) or the lowest point (bottom)
This method is a simple way to determine support & resistance by looking at historical data where prices hold.
The larger the time frame used, the higher the validity of the support and resistance. Using this method can help you see where the price is holding a lot.
Trendline
The trendline is one method that can be used as support and resistance.
To be able to draw a trendline well, you must identify the trend first by combining at least two valley points during an uptrend, and combining at least two peak points during an uptrend.
If the price approaches the trendline, then the opportunity area can be opened to become a resistance or support area as shown below.
Fibonacci retracement
Did you know that Fibonacci retracement is a forex analysis tool that is quite widely relied on by traders and can act as support and resistance?
Fibonacci is almost always in forex trading tools because it is considered as the main analysis tool or just an addition for novice or experienced traders.
If you have enough experience using MetaTrader, the Fibonacci retracement tool may sound familiar to you.
Fibonacci has levels that are commonly used, namely:
- 0.0% level
- Level 23.6%
- Level 38.2%
- Level 50.0%
- Level 61.8%
- Level 76.4%
- Level 100.0%
These levels are often used as a reference to determine areas of support and resistance. Therefore, you can take some popular levels that are usually used as a reference to determine support and resistance, namely 38.2%, 50.0%, and 61.8%.
That said, at these levels traders believe that buy or sell signals often appear with high accuracy.
Round number
What are round numbers? A round number is a level that is a round number and is quite easy to remember. The example is:
- USD/JPY with the psychological level of 100,
- EUR/USD at the level of 1.30000, or 1.40000
- AUD/USD at the psychological mark of 1.0000, etc.
In forex trading, there are various ways to determine areas of support and resistance on a forex chart, and one of the most interesting studies is “psychology in round numbers”.
The rounder the price numbers on the chart, the stronger the price position is to be used as support/resistance according to this strategy.
Pivot points
Pivot points are not indicators, but a branch of technical analysis that is used as a counter to determine areas of support and resistance. Traders usually refer to pivot points as objective support & resistance.
Pivot points are made based on the highest price (high), lowest price (low), and closing price (close) in the previous period, to generate estimates of support and resistance levels for future price movements.
This level is calculated by the following formula:
Pivot = ( H + L + C ): 3
However, there are also those who add high, low, and close prices for the previous period, with the addition of the current open period with the following calculation:
Pivot = ( O1 + H + L + C ): 4
Another variation can be by adding weights that are considered important, such as emphasizing market closing
Pivot = (H + L + C + ): 4
Basically, the use of pivot points tends to coincide with the use of layered support and resistance even several times.
The use of pivot points is the same as the use of support and resistance in general. When the market price approaches to support, it is likely that the price will reverse back up.
However, if the market price breaks through, the bearish pressure will continue towards the next support, and vice versa.
Moving average
Moving averages are often called dynamic support and resistance (dynamic support and resistance). Because this method moves according to price movements.
Moving averages are trend-following and delayed because they are based on past prices. During an uptrend, the moving average serves as support. However, during a downtrend, the moving average can act as resistance.
Therefore, many traders use this method as a technical analysis tool because it has the simplest and easiest indicators to use.
Important!
Although there are many methods that can be used to determine support and resistance levels in the market, without regular practice a trader will not be able to place support and resistance points properly and correctly.
For those of you who are still beginners, make sure you continue to do a lot of analysis, practice, and try to practice through a demo account so that your abilities can continue to grow. Understanding trends remains the main capital that you must have.
In addition, for traders who are still learning in forex trading, when you want to determine a position, try to keep the price in an uptrend if you want to take a buy position, with reference to the support area.
However, if you want to open a sell position, make sure the price is in a downtrend with resistance as the price reference. Placement of stop-loss (SL) and take profit (TP) can also take advantage of support and resistance.