Forex Trading | Forex Support and Resistance Tutorial

To first begin Forex Trading, you first need to understand some of the basics of the market. For instance, how the market moves, why it moves in the direction it does and how to find a good entry point to start placing bids. Understanding the concept of support and resistance lines will be our first stop.

Forex is a lot like trading stocks and if you have a solid foundation on how the stock market moves, the transition to forex trading will be fairly easy. If you have no idea how it works, this will hopefully give you a layman's viewpoint into forex trading. Best case scenario in this little rant is that you get a clear and accurate understand of how support and resistance lines work and are able to use this to become a better forex trader. Worst case scenario? You completely are stupified (which is not likely) by a concept so simple as analyzing support and resistance lines and decide that forex trading is simply not for you.

Concept #1 Understanding Support and Resistance in the Forex markets

Nothing new here. Just like the stock market, the forex market is nothing more than a battle between the bulls (the buyer) and the bears (the seller). If a currency pair is overvalued, the price will drop (make a correction) until it eventually hits a line of support. If the price is undervalued, then the price will rise until it hits a line of resistance.

Just like the stock market, the forex market tends to trend and repeat itself over and over. For instance, if you were to draw lines of support and resistance over 10 years, you will discover that most currency pairs pretty much stay inline with each other. Most forex currency pairs have a pretty set support and resistance line. When you drop the chart down to a monthly forex chart, it is really no different. The support and resistance lines pretty much follow a trend and as a future forex trader, it is your job to realize this trend.

Support and Resistance lines are nothing more than the top (and bottom) of supply and demand. The forex market tends to stay within these parameters. When they break these barriers, there could be a period of "trader's remorse", and the market either drops back into the broken barriers OR a new support and resistance line is set.

Support and Resistance lines are no more than the bottom and top points of supply and demand. Usually the forex market stays somewhere in the middle.

In order for anyone to fully appreciate this push and pull of the bulls and bears, one needs to think of it as "mini-battles" throughout the day in which the buyers and sellers try to move the market in the direction they want to move it.

Support and Resistance in Forex is nothing more than a constant push and pull from supply and demand and is nothing really that exciting. In fact, if you took economics 101, chances are you have a good handle on support and resistance.

Support levels is the line that define the price at which most forex traders feel the prices will move higher. Pin Pointing support levels is easy...just take a look a the day's lowest prices . These lows usually fluctuate around a certain point. This is the place where the support levels can be found.

Resistance levels is the line that defines the upper level of trading. This is the place where there are more sellers than buyers. Supply and demand at its finest!

It is important that you get this concept down if you intend to trade forex as it is probably the simplest forex concept and one that you can immediately employ, strategy wise. I would suggest that you start out with a weekly or monthly chart as identifying long term trends is much easier than identifying short term trends. Understanding how the forex market trends in a certain time frame is key to understanding how the market moves. This is primarily why you are going to want to use just one forex currency pair WITH a Trading Solutions rather than simply throw in real money.

Concept #2 When does Support become Resistance and Resistance become Support?

Once you can identify your support and resistance points with relative accuracy, the next step is to understand that although trends do happen with forex trading, trends are made to be broken. It is important for you to watch for this. Roll with trends until they look to be reversing. But the million dollar question is "when can you decide when a support or resistance level has been broken in the forex market?"

A lot of traders are going to be quick to pull the trigger when a support line or resistance line has been broken. If you look at the image below, you will notice that the resistance level was broken only to quickly fall back. These pullbacks happen when forex traders are testing the market. This happens and is easily identifiable by looking at the candlesticks.

Did the chart break the line of support or resistance only to retreat back to within its trend? It is easy to mistake the market breaking these points for new established lines of support and resistance. However, when you are determining your resistance and support lines, you need to understand that you want to create them in relation to the way the market is moving ON THE WHOLE, not simply the reflexes that happen from day to day. You want to analyze the trend, not the knee jerks of the market.

So, if the forex market is constantly ebbing and flowing and breaking support and resistance barriers, how do forex traders determine when a support or resistance line is really broken?

There is no real answer to this. Some forex traders consider where the market closes at the end of any given day as a good way to determine if the price has hit a new support or resistance line.

However, this is not always the case. If you used this strategy as a definitive place to determine support and resistance lines, you will get burned more than once. A better way to use support and resistance lines in forex trading is to think of them not as concrete numbers but as zones of opportunity.

So, judging from the forex chart above and supposing that we didn't see it in its entirety but had reached "point A" on the chart where the line began edging its way upwards, breaking the resistance level", would you automatically assume that that should be the new support line? Would you immediately start mapping out new support and resistance lines?

If you were smart, you would hold the phone and wait it out. Why? Because, normally when a support and resistance line is broken, it takes a second for forex traders to decide whether the broken barrier was justified. And this is one of the cruxes that forex trading are forged on and more importantly, it separates the forex traders who make money from the forex traders that don't.

Concept #3 Understanding "Trader's Remorse" in regards to the forex market.....

We've already established that these breaches are just tests in which the buyers or sellers are testing the market. So, let's say you are plotting out your next move. The market has been hovering right at the line of resistance, in which it is reaching "highs" right beyond the line of resistance but closing under the line. Suddenly, it breaks it at a close and starts to move forward.....Is this a good time to place a trade? After all, the forex market has broken the resistance line and therefore should be trending upward, right? Time to grab a pen and start charting out new support and resistance lines, right?......

Not necessarily....Enter "Trader's Remorse" to make trading forex a little more complicated....

If you haven't guessed it yet, the market is moved by people just like you and I and because of this, you need to understand the psychology behind trading forex. I have said this over and over again...understand how your fellow forex traders react to the market and you will have a definitive edge when it comes to forex trading. Don't bother and you will likely be one of the "dead" forex traders which consistently lose when trading.

Understand your fellow trader and how they react = Win

Ignore your fellow forex trader's impulses and reactions = Lose

Okay, so let's take a look at how trader's remorse fools even the more advanced forex traders.

Here is what happens:

When resistance or support lines are initially broken, buyers and sellers start to question the validity of the new price. Does this new price actually reflect it's value? One of two things will happen at this point....

1. The consensus among buyers and sellers is that the new price is not warranted in which the price will start to fall back into the old support and resistance barriers. This creates a "bear" or "bull" trap and it is at that point where those that rush in to buy or sell prematurely will lose because the market quickly falls back.
2. OR the traders/investors will accept the new price, in which a new support and resistance line will be established and the price will start to climb or fall (depending on which line was broken).

A good way not to get hoodwinked into falling into one of these traps is to pay particular attention to the volume of forex trades when it breaks the barrier and then watch the volume carefully after the initial break. Just because support and resistance lines are broken doesn't necessarily equate to an upward or downward trend on the forex market.

• If prices break with an increase of volume and the initial "trader's remorse" volume is low, then the new price will likely rule and a new support and resistance lines can be identified and set.
  
• However, if the "trader's remorse is high on the backend (high volume after the break), then it is likely that many forex traders aren't comfortable with the new line break and it should quickly return back to the old support and resistance levels.
  

I know that this has been a ramble but I really want new traders to understand the importance of identifying and charting out support and resistance lines as this is probably the easiest concepts to understand in forex trading.

Once you understand the concept of drawing support and resistance lines, we can move on to bigger and better things. But understand, that if you completely blow off analyzing support and resistance lines, then you won't be as effective of a forex trader. BABY STEPS y'all. That is what you need to take.

So in summation.....

1. Start studying current forex charts BEFORE you start to trade. Identify the support and resistance lines first with the longer time frames (year and month) and then move down. If you are want to do forex day trading, resist the initial urge to jump right in.
2. Once you have identified the support and resistance lines, chart it out. Do you notice any breaches that first looked like a new line that would be set only to watch it fall back into the old support and resistance frame? If so, check out the amounts of volumes that were sold in that time frame. Now examine the reason why the forex market moved back into its old support and resistance lines.
   
3. Also, once you have moved down to analyzing daily trends, start asking yourself why the forex market moved...was it because of forex news?....if so, make a log of it. You can probably examine the market news and see a pattern.

A couple more points on support and resistance and I am out....

• When the forex market passes through resistance, the resistance point becomes the support point (if it passes the trader's remorse test).
• The more often a support and resistance line is tested without breaking through, the stronger it becomes.
  

It is all about trends, y'all. If you want to trade and be profitable, you need to understand them. Support and Resistance lines can help you identify bullish or bearish trends in the foreign exchange market. Once a forex trader can get a good handle on the basics of support and resistance lines, they will be able to make better and more profitable trades. And as you know, we aren't in the forex market just for our health. As forex traders, we want to make money. Support and Resistance lines..learn how to do them and improve your forex trading potential. I am out....until next time...