Understanding "Support" and "Resistance"

At forex market, the concepts of “support” and “resistance” are undoubtedly two of the most highly discussed attributes of technical analysis. “Support” and “resistance” are often regarded as a subject that is complex by those who are just learning to trade. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control. If you clearly understand  about “support” and “resistance”, you will be able to take proper decision what to do whether buy or sell. You will know how forex market works if you understand “support” and “resistance”. 

In the above diagram,  the zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now “resistance” and it’s called “resistance level” (Number 1, 3,5).

When the market moves down and then pulls back, the highest point reached before it pulled back is now “support” and it’s called “support level” (Number 2,4).

 What is “Support”?

At forex market, “support” is the price level at which demand is thought to be strong enough to prevent the price from declining further. When the price declines towards “support” and gets cheaper; buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the “support” level, it is believed that demand will overcome supply and prevent the price from falling below support. In the following screenshot, the cross line is called “support”.

“Support” does not always hold and a break below “support” signals that the bears have won out over the bulls. A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. “Support” breaks and new lows signal that sellers have reduced their expectations and are willing to sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below “support” or below the previous low. Once support is broken, another “support” level will have to be established at a lower level.

Where “support” is  established?

“Support” levels are usually below the  "Pivot Point" , but it is not uncommon for a security to trade at or near “support”. Technical analysis is not an exact science and it is sometimes difficult to set exact “support” levels. In addition, price movements can be volatile and dip below “support” briefly. For this reason, some traders and investors establish “support” zones. 

What is “Resistance”?

“Resistance” is the price level at which selling is thought to be strong enough to prevent the price from rising further. When the price advances towards “resistance”, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the “resistance” level, it is believed that supply will overcome demand and prevent the price from rising above “resistance”. 

Where "Resistance" is established?

“Resistance” levels are usually upper the "Pivot Point".

What is Technical Forex Analysis?
Trend Line at Forex Market
“Pivot Point” Calculation
Understanding "Support" and "Resistance"
What is Forex indicator? 

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