Support and Resistance Levels

The forex support and resistance levels make up a very important part of the technical analysis of a forex trader. Some forex traders even claim that they are trading forex in a profitable way purely based on important support and resistance levels!

As you could have read in the introduction of technical analysis, in fact the human emotions are being reproduced on a forex chart. Human emotions hardly ever change throughout the years and that’s the reason why certain patterns usually will turn out to be very accurate. The same goes for the support en resistance lines.

What are support and resistance lines?

Support levels are price levels at which it’s not easy for the price to get below them and resistance levels are price levels at which it’s not easy for the price to get above them. You may regard this as the floor (support) and as the ceiling (resistance) in a house.

Attention please! When a price levels has served as support, but then it is being broken through, consequently this same price level will often serve as resistance. The same applies the other way round. When a price level has served as resistance, but then it is being broken through, as a consequence this same price level will frequently serve as support.

Support and resistance lines are often being used by traders to take up a position or to close their position in order to secure their profits.

Support

When there is a matter of a support level, then the price cannot break through that level, because as a consequence more buyers will enter the market and will be going to take the upper hand over the sellers.

The more a price is being unable to break through a support level, the stronger this support level will be.

When there is a matter of a support level, than this is often caused by two reasons:

  • Traders are opening new long positions
  • The former short positions are being closed, because traders want to take their profits.

Resistance

When there is a matter of a resistance level, then the price cannot break through that level, because as a consequence more sellers will enter the market and will be going to dominate the buyers.

The more a price is being unable to break through a resistance level, the stronger this resistance level will be.

When there is a matter of a resistance level, than this is often caused by two reasons:

  • Traders are opening new short positions
  • The old long positions are being closed, because traders want to take their profits

Straight and oblique support and resistance lines

When you study a chart precisely, you’ll notice that you can draw straight support and resistance lines as well as oblique support and resistance lines.

Let’s first examine an example of a straight support and resistance line:

support-resistance

On the above shown chart you can clearly see that the black line is twice serving as a resistance line. The price is unable to easily break through this price level. When this resistance level is going to be broken through, you’ll also see that exactly the very same line is eventually serving as a support line. In this case resistance has become support.

A support or resistance line doesn’t necessarily need to move in a horizontal direction. When you’re thoroughly examining a forex chart, you’ll see that oblique support and resistance lines can be very reliable to predict price reactions!

An example of an oblique support and resistance line:

schuine support resistance

On the above shown chart you’ll be able to clearly review this principle. While at the beginning the black line was regarded as an important support level, it eventually became an important resistance level when the support level had been broken through.

Trend line and Channel

Trend line

A special form of an oblique support/resistance line is the so-called trend line. A trend line actually is an oblique support/resistance line within a trend. A trend line is being used to reproduce the trend of the price and to determine the area where price action could possibly take place. Within a trend you frequently will be able to draw several trend lines by connecting two or more support or resistance levels with each other and by following this same line.

Channel

Channels in fact are parallel trend lines, at which the price is moving between the top and the bottom trend lines.

On the chart shown below you can see a channel at which the bottom line represents a trend line. As you can see the price is generally moving neatly within the channel, the bottom line, being the trend line, serving as support and the top line of the channel serving as resistance.

trendlijn channel

Round numbers indicating support or resistance levels

Round numbers frequently are good indicators of important support en resistance levels since these are regarded as important psychological levels. Just have a look at several forex charts and see how often round numbers serve as support and/or resistance levels.

The rounder the number, the bigger the chance that it represents an important psychological level. This way the number 1.000 most likely is a more important support/resistance level as the less round number 1.150.

Reliability of support and resistance levels

Support and resistance lines in general are very reliable, but that does not mean that these levels will hold out forever or that the price will exactly bounce off because of a certain support or resistance level.

That’s why forex traders, next to support and resistance lines, are also applying other tools. So by combining several means with the support and resistance lines, it can be more correctly estimated to what extent the chance will be realistic that a support or resistance level is also going to hold out in the foreseeable future.

Timeframe

Support and resistance lines are in general more reliable on the more extensive time frames, i.e. for instance the four-hour chart and the even longer ones. As it happens on the shorter time frames there are occurring more arbitrary price actions, which are also called noise.

Conclusion

In case of the OFS Trading System, support and resistance lines are an important part of the trading system, but by way of additional support the OFS Trading System for instance also employs moving averages. In the next article we therefore will discuss the moving averages.

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