Support and resistance trading is a popular type of trading analysis that’s based on historical pricing. Traders in all markets, including the forex market, use this type of trading in order to find potentially profitable trades.
Trading is ideal for specific types of traders and certain currencies; there are some strategies that work better with other forms of technical or fundamental analysis. Either way, it’s a good idea for a trader to understand the basics first, and to use this knowledge to augment their technical analysis skill-set.
Trading: The Basics
Support and resistance trading involves determining a price point that the market generally attempts to sustain.
In simplest terms, this is the lowest point at which the price tends to fall and the highest point that the price tends to rise to.
In a simple support and resistance trading strategy, a seller will sell a currency that is currently above its “resistance” price (the highest price that it generally obtains) and will purchase a currency that is below its “support” price (the lowest price that it generally obtains).
The assumption is that the price will always go lower than the resistance price and remain above the support price, regardless of any other market variables. But that doesn’t mean that the support and resistance points always remain static.
Support and resistance points may drift upwards or downwards.
This is why support and resistance trading can be combined with other technical analysis methods such as moving averages. Regardless, the idea behind it is very simple: traders simply buy when the price is well below what it “normally” is and sell when the opposite is true.
How Does Support and Resistance Trading Work?
This type of forex trading sounds more complex than it really is.
Here are a few examples of support and resistance trading (though the numbers are simply offered as examples).