Support and resistance is the first thing that any beginner in the forex market should learn to take a step forward for technical analysis. Every experienced trader has made his strategy to measure the support and resistance.
So first of all, let’s get to the basics. First, we will concentrate on the following diagram to understand the resistance and support:
In the above zig-zag pattern, there are two types of points, top and bottom. Suppose, the price of a particular currency pair is going up (because of the bull market), and after a point, it reverses. The point at which the price starts pulling back is called resistance.
Now, the price will start moving down and continues; so the point at which it again takes a ‘u’ turn is called support. The forex market keeps on oscillating and keeps on making resistances and supports. The exact opposite goes for a downtrend.
Support and Resistance Plot
Do not take support and resistance as exact numbers as these are not. Many times you may see that the market is testing a particular support or resistance level by breaking the points. Here is a candlestick chart showing the market testing the support level:
In this chart, you can clearly see how the price is going below 1.4700 level, but eventually closing above it. This is how market breaks the support levels but mostly closes above it.
It is very important to remember that the market again takes a ‘u’ turn as many beginners get into panic mode when they see the supports breaking.
Is There a Way to Know if the Support and Resistance Levels are Broken?
Well, the traders are still arguing to get to a conclusion for this question as some say that the resistance and support are broken when markets close below that particular level while others think that even if the markets are closing above that particular level, it is still breaking the R&S levels.
According to the above chart, the levels are going far below 1.4700 before taking a turn. Many beginner traders exit the position thinking that this is the breakdown. But if you see the whole chart, you will see that finally, the price closed above the level.
It becomes easier to read the support and resistance levels using a line chart as it just shows the closing price rather than the extreme highs and lows as shown in a candlestick chart.
Support or a resistance could be just a reaction of the market due to some economic news which is not likely to happen again. Here is a line chart showing the resistance and support levels:
In the above line chart, you will see how easy is it to analyze the levels. Mostly it is around the areas where you can see that the closing price is forming several valleys and peaks.