Trading support and resistance in one of the most rewarding ways of trading Forex and any other financial market. In its essence, it’s pure price-action trading in which traders take advantage of obvious levels of increased supply of and demand for a currency or a financial instrument.
You might already know about the concept of support and resistance. Market levels where the price has difficulties to break above due to increased supply form resistance for the price; and market levels where the price has difficulties to break below due to increased demand form support for the price.
Both support and resistance can appear in the form of horizontal or trendline support and resistance. When you’re looking to identify a potential support or resistance zone, make sure that the price touched the zone at least three times in the past. This ensures that the zone is important, and we can assume that it will provide support or resistance to the price in future price-action.
A confluence forms when horizontal and trendline support or resistance overlap. Confluence zones often provide great trading opportunities, so watch out for them the next time you analyze your charts.
Another great way of trading support and resistance zones is to wait for the price to make a pullback. A pullback forms when the price breaks and then retests a previous support or resistance level, i.e. a broken resistance turns into support, and a broken support turns into resistance.
A broken resistance hosts a significant number of buy orders as the buyers are looking to reenter the market at a more favorable price (lower price) once the price retests the broken resistance. Similarly, a broken support level hosts a large number of sell orders, as sellers are looking for sell opportunities at higher prices once the price retests the broken support.
With a little experience, you can start to profitably trade horizontal and trendline support and resistance levels, as well as pullbacks to those levels. The mentioned concepts rely purely on price-action and the underlying psychology of market participants, which makes them a great tool for making trading decisions.
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