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Trade Forex With Support And Resistance Levels
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Trade Forex With Support And Resistance Levels

Technical analysis is the use of technical indicators when trading forex using the forex charts. Of the various technical indicators that are available, support and resistance levels are one of the most commonly used indicators. It is in fact one of the most popular technical indicators used by forex traders due to the fact that it is very a effective tool used to forecast the price movements in the currency pairs. Using support and resistance, traders can determine whether to go long or short based on average probabilities and during times of what is refered to as price congestion. Not only forex, but also in binary options trading, it can be a very useful technical indicator that will enable traders to place correct positions in a chart. The advantage being that such kind of technical analysis can be used with any type of markets. Whether you are trading forex pairs, stocks or CFD's or even commodities. The basic concept applies to all.

So what are support and resistance levels in forex trading

Support is defined as a price level where in there lies a high probability that the support level acts as a floor (in other words, supports the price) and prevents the price from falling further below. When a trader learns how to identify the support level, they are able to base their buying decisions. Support level works on the principle that when the price increases buyers will start buying and therefore creates a support level.

Likewise, Resistance is defined as a price level that acts as a ceiling and prevents the price from rising any further. Identifying resistance levels enables the trader to make selling decisions. Resistance levels are formed when the supply is higher than demand and therefore, the only direction the price can move is downwards. Traders start selling thus creating a ceiling on the price and prevents an increase any further.

How to identify support and resistance level

Support and resistance levels are popular for a reason, for the fact that it is relatively easy to identify from a chart. At the outset, the trader should use candlestick charts which enable them to clearly understand and see the support and resistance levels on any type of markets they wish to use it on. Candlestick charts are a topic unto themselves. Learn more about the basics of Candlestick charts.

To identify support and resistance levels, simply look for the high and low points in a chart. For traders who want to open a LONG position, set up a stop level a few pips below the support level. This is because the price will only rise upwards when they hit the support level. By setting up a stop loss, in the event the price breaks the support level, your position will be automatically closed thus preventing any further losses.

Another point to mention when trading with support and resistance is the ability to distinguish between strong and weak levels. It is a known fact that trading on a strong support or resistance level will increase the chances of making profits. It depends on the time frame you are using. A longer time frame can reveal the strong levels as compared to say a 5 minute or a 10 minute chart. Weak levels in support and resistance can however enable the traders to place exact entry and exit points on the trade.

What are Strong and weak levels in support and resistance

An easy way to understand if the support and resistance levels are strong is to look back on the charts and see if those levels occur atleast a few times in the past when looking at a longer time frame chart. If the support and resistance levels did indeed occure a few times during a 24 hour period when using the one hour time frame charts, then such support and resistance levels are indeed strong and can increase your probability of gaining profits by opening your trade positions, be it buy or sell.

Besides the time frame and the occurance, Fibonacci levels when used with support and resistance levels can further increase the probability of the price movements.

Support and Resistance levels are quite easy to understand and traders, especially the beginners should start using them immediately. However, although this technical indicator is widely popular, they are never 100% accurate all the time. It must be mentioned that support and resistance can be easily manipulated when you open and close a lot of orders and thus they can be manipulated. Although it is advised to use support and resistance trading always use it in conjunction with other technical indicators such as Fibonacci levels in order to justify and reconfirm your trading decisions.

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