Support and resistance is a term in forex used to explain price levels that a currency pair does not often get to. Naturally, currencies fluctuate and their value rise and fall, but within a certain price bracket. When the security rises above the price range for which it is known for, it is said to have gotten to either a support or resistance level, depending on its direction.
WHAT IS SUPPORT AND RESISTANCE?
By definition, support level is where forex demands are perceived to be strong enough to prevent the price of security from falling further; while resistance level has got to do with a point where selling is so strong that it prevents the price of the security in question from going higher. So, the lowest low the price of a security can get to before it starts to appreciate is known as the support level; while the highest high the price of a security can get to before it starts to depreciate is known as the resistance level.
No matter what approach a trader decides to take towards the forex market, there is always need to analyze the market first in order to understand what time is best to either buy or sell a currency pair. There are many methods of doing so, the basic ones are
1. Fundamental analysis
2. Technical analysis
3. Sentimental analysis
For the purpose of this article, our concern will center on technical analysis, which is where the support and resistance technique lies. Technical analysis of the forex market has to do with studying the price movement, like in the case of support and resistance. It takes full consideration of the supply and demand levels, as well as market psychology, which when put together, can five one a clear view of what prices are like, or will be.
WHY SUPPORT AND RESISTANCE HAPPENS
Nothing just happens randomly in the forex market. There are reasons behind every price movement, and as such, traders are advised to trade accordingly with a good trading plan/strategy. In the case of support and resistance analysts and traders watch the price movement, in addition to the rate of supply and demand, and they are able to tell when there is about to be a support or resistance.
If a currency pair is hot and selling off in the forex market, there is good rate of demand, and there are many traders to fill out the demand, then the price of that security will gradually be decreasing. If the demand keeps rolling in to the point where the number of buyers is more than that of sellers, then that is the support level. If on the other way round, the number of sellers exceeds the number of buyers, then there is a resistance about to happen.
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