Pinnacle Forex Group

Forex Support and Resistance:

Support and Resistance levels are going to be needed and used for nearly everything in this market. We need to understand them, how they work and think of them in our sleep. Once we think we understand them really well, we need to go back over it a dozen more times to make sure we understand them. First we need to know what is so important about Support and Resistance.  Really, all we are talking about here is a price level or range where potential reversals are likely to occur off of a position; frequently based off of past history and previous trends. Ok…..What??

Let’s start off with support; the easiest way to describe a support level is comparing to a floor. Sort of similar to how a super ball works. Take a super ball and bounce it on the floor and what happens? The ball bounces; in this case the floor is the balls support. The markets are no different. We could say that the floor was obviously the Support level preventing the ball from dropping further. Had there not been a floor there the ball would have dropped until it found some support to bounce off of. That is what we are looking for.  Look at the chart below for example.

What we are seeing is that on this EURUSD 4 hour chart, right around the bottom red line at the 1.3460 level we have candlesticks that have hit that level several times and can’t seem to break it. The first time they hit looks like Feb. 19th, the market bounced off and came back again and hit the same price range. Once more the second time it hit and bounced again. At this point I would have done just what I did and drawn a horizontal line at that level and said “ok, this is support” if a candle closes below this level we are going even lower. But for now we can enter a buy position on that bounce and make some profit. We can be pretty sure that if it bounced there before it will bounce there again when it comes back to it.

A closing candle’s price is very important. If you take a look at that price again 1.3460 you will notice that the tail of the candle breaks below a little. That is ok; any support or resistance level is not broken until the body ends or closes below the level. We can call this a “test” on that support.  Once again we can buy off of support levels and look for profit at resistance levels. On the chart above I show you where to buy. If you take a look at that candle you will also notice one thing, it completely “over powers” the previous candle. We haven’t gotten into this yet but that is called an engulfing candle. That candle is a great one to enter into a buy once it closes.

Support levels can be easier to spot when they are horizontal but almost as frequent as a horizontal support we can find diagonal support levels.

Right here on the USDCAD there is a great example of diagonal support. As with horizontal support levels these can make great buy opportunities when we spot them or sell opportunities when a candle breaks them. Once we have spotted a nice buy position and have entered into the trade we need to find a good place to place a Take Profit point. These levels can be easy to spot off Support levels simply because they will end up being the closest Resistance level. Resistance levels are price levels or ranges where potential reversals are likely to occur off a buy position; frequently based off of past history and previous trends. So, we are really looking at the exact opposite of a Support level. Just like in the super ball example, resistance levels are like the table or the ceiling levels of the market. Once we bounce off of support we can expect to hit resistance and bounce back down again, at least that's what we are going to assume.

Once we bought at the support levels we will find the price of the line where the resistance is and set our TP at resistance. In this case we have several levels of resistance. The bottom horizontal line, notice at one point in time was also a support. That is very common. When support is broken it will then become resistance, once resistance is broken it will become support. Take notice for example on the first but on support on the far left, we TP at 1.057 since that was pervious support. On the second buy position we TP again at previous support assuming it will be resistance at 1.0492. On the third buy off of support we repeat the same theory; we buy on support and TP at resistance again at 1.0492. Notice on the third buy the markets exceeded and broke our resistance level and continued on to our first buy positions resistance level. Had you taken profit on the 1.0492 level you would have been ok and completely justified in getting out of that trade. You would have made pips but also left some on the table. That is completely ok. It's better to be safe and exit the market leaving pips on the table then to shoot too far, catch resistance and end up negative in your trade. This is how we are going to play the markets day in and day out, following different support and resistance levels. Remember, candlesticks are not the only things that we use to base support and resistance; there are plenty of indicators that we will be using along the way that will be used to measure support and resistance as well. With what we know now, we can watch these markets like a super ball bounce off the floor and ceilings all dayThe biggest difference here is we will hopefully be enjoying the profits that come from these bounces.