Forex Price Action Basics - Lesson 7: Support and Resistance

 

Previous lesson, Forex Price Action Set-ups...

 

So far in this Forex price action course, we have covered the basics of Japanese candlesticks, trending markets, ranging markets and price action set-ups. If you need a refresher on any of these topics, please go back and read and watch the needed lesson again. By now, you should know how to identify the high, low, open and close of price using a Japanese candlestick, understand chart time frames, know of downtrends and up-trends, identify the swing highs and lows of a trend and understand the basic of price action set-ups, including engulfing candles, pin bars and other setups.

 

This lesson will cover support and resistance. Support and resistance is possibly the most used price action phenomenon in Forex trading. It helps traders, investors and analysts, to pinpoint potential areas of price reversal and is considered one of the most reliable forms of technical analysis.

What is Support and Resistance?

 

Intro

 

Support and resistance are price levels within the Forex market that price has historically reversed. Support and resistance is used to identify potential areas of technical and psychological importance. Knowing of these areas can help a trader to predict future price reversals. One of the many things that I have learnt over the many years that I have been trading Forex, is that what price has done in the past, within a financial market, will likely happen again. For example, if the EURUSD climbs to a price of 1.2500 and sharply declines from this level, it is likely that next time the EURUSD climbs to 1.2500, price is likely to see some decline again. To demonstrate this principle, please check out the AUDUSD daily price chart below...

Do you notice that price reversed at a certain level in October 2015? What happened when we reached that level again in December 2015? Price reversed again. Hopefully from this example you can see how important and profitable it can be to identify areas of historic price reversal for potential future price reversal.

 

Forex Support

 

When these potential reversal levels are under price, they are referred to as support levels - they support price and hold price up! Below is another price chart, I have marked the support levels with a horizontal line and have highlighted when the support is reached and price reverses.

 

 

 

 

 

 

 

 

 

 

Forex Resistance

 

When the potential reversal levels are above price, they are referred to as resistance levels - they act as a resistance or barrier to upwards price action. Below is another Forex price chart, I have marked the resistance levels with a horizontal line and have highlighted when price reaches the resistance and reverses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Support becomes Resistance, Resistance becomes Support

 

Eventually price will move below a support level and above a resistance level, this is usually referred to as a break or breakout. When support is no longer valid and price has moved below the support level, the level can then act as a resistance level. When resistance is no longer valid and price has moved above the

resistance level, the level can then act as a support level. Perhaps the charts below will teach this better than I can with words...

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Can you see the resistance level marked by the red line? When the resistance is broken, you will notice that the previous resistance level now becomes a support level.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The chart above illustrates a support level that becomes a resistance level. 

 

Trend Support and Resistance

 

In Forex trading, support and resistance areas don't always have to be horizontal levels, they can also be diagonal. Below is the same AUDUSD daily chart that I used at top of this page. Do you see the diagonal support line? Do you notice that price continually reverses each time this support line is reached?

 

 

 

 

 

 

 

 

 

 

 

 

Support becoming resistance and resistance becoming support is also evident with diagonal support and resistance. Check out what happens to price on the AUDUSD when the previous diagonal support is met...

Floors and Ceilings...

 

An easy way to remember the price action principle of support becoming resistance and resistance becoming support, is to visualise a block of apartments or a high-rise office suite. Think of being on a particular level of the building, the floor (support) is beneath you and the ceiling (resistance) is above you. When you take the stairs or elevator to a floor higher, the previous ceiling (resistance) is now your floor (support). When you take the stairs or elevator lower, the previous floor (support) is now your ceiling (resistance). This allegory of floors becoming ceilings and ceilings becoming floors demonstrates how support turns resistance and resistance turns support.

Watch this lesson in Video...

There is a very high degree of risk involved in trading.Past results are not indicative of future returns. Technical Forex and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice.Information for forex trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of Technical Forex may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading Forex, Options on Forex, and any retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Technical Forex is not an investment advisory service, is not an investment adviser, and does not provide personalized financial advice or act as a financial advisor. Technical Forex exists for educational purposes only, and the materials and information continued herein are for general informational purposes only. None of the information provided in the website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, recommendation or sponsorship of any company, security, or fund. The information on the website should not be relied upon for purposes of transacting securities or other investments. You hereby understand and agree that Technical Forex does not offer or provide tax, legal or investment advice and that you are responsible for consulting tax, legal, or financial professionals before acting on any information provided herein.

Technical Forex is dedicated to providing high quality content on Forex technical analysis - info@technicalforex.com

© 2015-2020 TECHNICAL FOREX