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Understanding How to Use a Support and Resistance Forex Trading Strategy

In the forex arena, those traders who adopt a technical analysis method, through a platform like FxPro, operate by using charts and graphs to forecast future currency prices based on previous market movements. The manner in which this works means that forex movements are, in large part, a self-fulfilling prophecy: so many traders adopt this strategy, and make their movements based on how others are trading, that they mirror each other’s actions, and this is reflected in real market movement. Thus, technical analysis is validated, and more and more people flock to it.

If you are one of the method’s many adherents, it’s important to understand how to utilise this analysis to your benefit, and you cannot do so without first understanding the concepts of ‘support’ and ‘resistance’.

Support and Resistance

 Arguably the most effective, and thus the most popular, form of technical analysis is support and resistance. The concept is relatively simple to understand. ‘Support’ is the ‘floor’ or lower boundary that a currency pair struggles to breach. ‘Resistance’ is its opposite: the upper boundary equivalent.

These concepts are very important to understand, as support and resistance are the points at which the market will usually change direction. You should always be aware of them, as if a pair exceeds or falls below one of these points it usually leads to frenetic activity within the market. This phenomenon is known as a ‘breakout’.

How Can You Use Support and Resistance to Inform Your Trades?

 Support and resistance, although perhaps interesting, would be of very little relevance to us, of course, if we couldn’t use them to inform our trades. This can be done in a number of ways. Depending upon their personal approach, those who use these concepts to develop their strategy are known as either range traders or trend traders.

Range traders use support and resistance to guide when they buy and sell: when the price exceeds support, they purchase a currency pair; when it falls below resistance, they sell.

Trend traders are the polar opposite: they make purchases only when the price rises above the level of resistance; and sell when it falls below the level of support.

 

Despite their differing methods, the object is always the same: to make a profit on trades. Thus, purchases are made if an increase in the price of a currency pair is foreseen. Alternatively, pairs are sold when it looks as if their value will fall, to be bought again at a lower price.