Many traders refer to the concept of support and resistance as the backbone of technical analysis. It is by far one of the most widely used tools in Forex, there’s no question about that.
Support and resistance are used by traders to identify potential points on Forex charts where prices are likely to change direction. They are lines, best viewed as areas or zones where, in the past, buyers became sellers and sellers became buyers.
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Support represents the minimum point in a downward price movement. When the price reaches the support level, there is the possibility of a directional shift, leading to an upward movement in prices. In the forex realm, traders commonly liken support to a ‘floor’ that provides support, effectively holding prices in place.
The existence of support levels indicates a scenario where there are presently more buyers than sellers, reflecting a higher demand than supply in the market. These levels are depicted on the chart using horizontal lines, consistently positioned beneath the current market price.
Resistance marks the apex of an upward price movement. When the price reaches the resistance level, there exists the potential for a directional reversal, initiating a decline in prices. In the forex domain, traders commonly characterize resistance as a ‘ceiling’ that constrains prices, preventing them from ascending further.
The presence of resistance levels indicates a scenario where there are currently more sellers than buyers, reflecting a surplus of supply over demand in the market. These levels are illustrated on the chart using horizontal lines, consistently positioned above the current market price.