Lesson 11: Supports and Resistances on the Forex

Supports and resistors are without a doubt the most widely used, most known and widely used graphical analysis tools. No trader, even the most "purists" does without the supports and resistances.

However, many beginner traders are using poorly or incompletely the supports and resistances, and so we will enter here into the details of their use.

Basic Definitions of Media and Resistors in Graphical Analysis

Support

A medium is a price level (represented by a horizontal line on the charts) on which prices tend to stumble. That is to say that in a fall, if the prices encounter a support, they will tend to stop their decline and to rebound on the rise. If the prices cross this support, they are said to "break it", which is heralding an acceleration of the decline.

Resistance

On the other hand, resistance is a level of prices over which prices tend to rise. That is, in a rise, if prices encounter resistance, they will tend to stop their rise and start again. If prices overcome this resistance, we can expect an acceleration of the rise.

The link with Dow's theory

As stated in the previous lesson, the entirety of the principles and techniques of graphic analysis relies on Dow's theory.

We have had the opportunity to present the concept of "higher" (peaks) and "lower" (hollow), and it is thanks to this concept that we can identify the supports and the resistances:

→ A support is therefore a horizontal line which passes through several troughs of the same level. 
→ A resistance is therefore a horizontal line which passes through several peaks of the same level.

To draw supports and resistances, you have only to:

1 / Identify the most significant peaks and troughs 
2 / Identify peaks and troughs of the same level

You will notice that the supports and the resistances are only "special cases" of the rule of the highest / lowest: Instead of being increasing (increasing) or decreasing (decreasing), these are of the same level.

Supports and resistances in practice

There are two main uses of media and resistors: They can be used to position goals, or as a trading decision tool.

Use Supports and Resistors to set goals.

If you spot a sales signal, and you can also identify a medium, it may be worthwhile to place a lens just before the medium, as prices will tend to rise again after they come into contact with the medium.

Conversely, if you spot a buying opportunity and also a resistance, it may be wise to place a target just before the resistance since the prices will tend to stop their rise in the zone of the resistance.

Use bearings and resistors to perform trading operations.

Since prices have a particular behavior when approaching a support or resistance, it is possible to use this behavior to do trading operations.

The case of the normal behavior of the supports and resistors: Purchase on support and sale on resistance

This will enable us to take a position on the purchase when approaching a medium, since we know that the prices have a good chance of starting up after having touched the support.

Conversely, an order of sale may be placed if prices are close to resistance, since they will a priori tend to start again after having touched resistance.

The case of breaks in supports and resistors

The supports and resistors are not eternal, and so comes a time when they are broken, which can also give rise to trading opportunities.

Indeed, when a currency crosses a resistance, there is often a violent movement, as the courts "released the pressure" accumulated by being constrained by the resistance. It may therefore be advisable to position itself for purchase on a crossing of resistances.

The reverse is also true for media, whose breaking can offer sales opportunities.

Limits and difficulties in the practice of supports and resistances

In reality, the theoretical principles of the supports and the resistances are unfortunately sometimes difficult to apply ... The supports and the resistances are indeed rarely precise levels, but more "zones".

It may therefore be difficult to spot true breaks and crossings if one lacks experience, especially as the courses "test" the supports and the resistance regularly and then immediately respect them again ...

There are different techniques to confirm or disprove these breaks and crossings, which for the most part are simply common sense. To learn more, we advise you to learn more about our video program at the University of Forex, which contains very interesting details, as well as concrete examples on the application of the supports and resistances.