Support and resistance, a very common subject to discuss among forex traders as these two indicators make it easier to decide when to close and open a position. Support comes into play when the price falls below a particular point which is basically decided by checking the price history. Resistance comes into play when the price shoots up above a specified level.
But there are some indicators that you should know to identify when to open or close a position. In this article, we are going to study those indicators:
Swing Highs and Lows
In the forex market the price of a currency pair keeps in making highs and lows, but this price dance also creates a level which breaks the past levels. There is a high possibility that when the price touches that level again, it could bounce back.
This breaking of levels is also called support and resistance. So it is crucial to check the price history using different time periods. Studying the swing of highs and lows is an intensive and time-consuming method, but it pays off in a long run.
Let us understand it with a chart:
In the chart, there are two red circles which are an indicator that the price has made a new high and a new low. Now when the price again reaches that same level (shown by white circles), it bounced back. Of course, you may find that the price has made a new high or low, but most of the times it bounce back. This is an indicator for buy and sell.
The price of a currency pair in the forex market is also dependent on the psychology of the traders. When a trader chooses a price to pick a currency pair, he usually prefers the one with a lot of 0s. Psychologically a human being always gets attracted towards a round figure.
You must have noticed that whenever anybody discusses something where numbers are involved, they always use a number with maximum zeros. Also, round figures make it easy to do oral calculations.
While trading in forex, you may see that the whole numbers have a maximum number of buyers. And this is what creates support and resistance.
Numbers with four zeros such as 2.0000 or 200.00 have the most powerful psychological levels; after this a number with three zeros and finally with two. Here is the chart that shows the effect of psychological levels:
Pivot points are created by the platform of your broker. You don’t have to do anything to create these points that are created by the historical price of the currency pair, preferably the highs and lows on a daily basis. You can check the pivot points to open and close the position as these acts as support and resistance. Here is an example of the chart showing the pivot points:
To get the best and exact price for opening or closing the position of a currency pair, it is important to use at least two of the aforementioned three methods. Do not jumble up everything and make resistance and support strategy confusing. You just need to use different methods to get to a final price. It is recommended that you practice on a real time demo account before going on the floor.