3 Easy Steps to Trade Forex (Part 2)
By James Stanley
After a trader has learned to identify trend (which we looked at in our previous article available HERE), the next focus that they will generally want to emphasize is in regards to Support and Resistance. Support is a price or a ‘price zone,’ in which buyers have shown, or may show an interest in buying. Resistance is the opposite; a price at which investors have shown, or may show a willingness to sell.
Created with Marketscope/Trading Station 2.0
As you can see in the above picture, when price approached or entered in the ‘Support Zone,’ price had shown a tendency to go up. By price going up, we can assume that there were more buyers than sellers in the market.
Also, as price enters or approaches the Resistance Zone, traders have shown a tendency to sell in the past.
Identifying Support and Resistance in this fashion can be classified as using Price Action to display these levels; as traders are using the price chart itself, devoid of any other indicators or studies to assist.
Support and Resistance can be extremely important for traders to identify as taking a BUY position when price is approaching or in a resistance zone could be potentially costly.
Or, perhaps, imagine taking a SELL position as price is in a Support Zone. If traders respect that support as they had in the past, and ensue with more buying than selling – driving price higher, once again that could be potentially costly.
There are numerous ways of identifying Support and Resistance, or potential Support and Resistance price zones. This is where areas of study such as Fibonacci can come into play, as many traders will look at ‘Fibonacci levels,’ to point out potential prices that may become Support or Resistance in the future. The links below offer more information in specific regards to Fibonacci.
Created with Marketscope/Trading Station 2.0
Pivot points are another study that traders will commonly look to in an effort of forecasting potential price levels that may function as support or resistance in the future. Pivot points are based on calculations of previous day’s price action. Once again, the links below contain more in-depth information into the study.
If you would like more information Support/Resistance:
Fibonacci Retracements: How to Trade Fibs in Forex
Pivot Points: Floor Trader Pivots
DailyFX PLUS Online Video Course Lesson 1- Support and Resistance
How to Trade with Support and Resistance Part 1
How to Trade with Support and Resistance Part 2
--- Written by James Stanley
To contact James Stanley, please email Instructor@DailyFX.Com. You can follow James on Twitter @JStanleyFX.
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