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The concept of support and resistance levels forms the basis of Forex technical analysis.

Support and resistance are two different levels that price has a history of being unable to ‘break’. These support and resistance levels are important points in time as this is when the market forces of supply and demand are considered to have met. When these levels become broken, the market forces of supply and demand are assumed to have moved, in which case new levels of support and resistance will be established.

Many traders use support and resistance levels on a chart as part of their technical analysis before making a trading decision. 

 

 

Support is at a consistent level underneath the trend that price cannot break, it typically reverses the trend somewhat to the upside.

At this point buyers ‘overcome’ sellers.

 

support graph

 

 

Resistance is at a consistent level above the trend that price cannot break, it typically reverses the trend somewhat to the downside.

At this point sellers ‘overcome’ buyers.

 

resistance graph

 

 

There are two different categories of support and resistance levels, these are;

  • Minor
  • Major

 

Minor support and resistance levels are where prices from a long-term trend have ‘paused’. These are typically found on a chart with lower time-frames, such as 15 minutes, 1 hour and 4 hours. These resistance levels are more likely to be broken.

 

Major support and resistance levels are key reversals of a long-term trend. These are typically found on a chart with higher time-frames, such as daily, weekly and monthly. These resistance levels are less likely to break.

 

Let’s take a look at how you would plot your support and resistance levels, below.

 

 

Step 1

We recommend using the ‘top-down‘ analysis approach.

This is where you look at higher timeframes and working your way down to lower timeframes. 

You can reference each time-frame by using different coloured lines. For example, we have used red to indicate monthly, green to indicate weekly, purple to indicate daily and yellow to indicate the 4 hour chart.

 

Step 2

View the price on a line chart.

This is because the most important characteristic you want to look at when plotting your support and resistance levels is the closing price. This way you are reducing the noise (e.g from wicks on a candlestick chart) and this shows us more of a consensus for price at that period of time.

 

Step 3

Go to the highest timeframe that you want to analyse, here we have started on a 1 month chart. We begin to look at key turning points.

Step 4

Now that you have found the key turning points in price, you can begin to plot your support and resistance levels.

Step 5

Repeat this process for different timeframes. For example, 7 days, 1 day, and 4 hours.

Step 6

Now you have added all of your colour coded support and resistance lines. Head to your normal trading timeframe, such as 15 minutes – where you can now see your added support and resistance levels, which can aid in your trading decisions.

LESSON SUMMARY:

– The concept of support and resistance levels forms the basis of Forex technical analysis.

– Support and resistance are two different price levels in which the price has a history of being unable ‘break’ either of.

– Support is at a consistent level underneath the trend that price cannot break, it typically reverses the trend somewhat to the upside. At this point buyers ‘overcome’ sellers.

– Resistance is at a consistent level above the trend that price cannot break, it typically reverses the trend somewhat to the downside. At this point sellers ‘overcome’ buyers.

– There are two different categories of support and resistance levels; minor and major.

  • Minor support and resistance levels are where prices from a long-term trend have ‘paused’. These are typically found on a chart with lower time-frames, such as 15 minutes, 1 hour and 4 hours.
  • Major support and resistance levels are key reversals of a long-term trend. These are typically found on a chart with higher time-frames, such as daily, weekly and monthly.

Lesson tags: free forex course
Back to: Free Forex Course > Step 7 - Technical Indicators
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