Learn Forex – What is Support and Resistance

Good day fellow forex trader, and welcome to this beginner level tutorial on support and resistance.

Thank you for stopping by. I hope that you gain something useful for the time you invest in reading this.




The concept of support and resistance is CRUCIAL for you to fully understand if you want to successfully interpret currency charts.

Before we get to defining what support and resistance are, let us first understand some of the basic economic factors that drive the market.

The price at any instant in the forex market is determined by 2 factors - supply and demand.

  • When there is more supply than demand ... ie. there are more sellers than buyers ... then the price will be dropping (or "dipping" in forex jargon). This is because the larger number of sellers will be constantly dropping their asking price in an attempt to encourage the fewer buyers to buy.
     
  • If there is more of a demand than a supply ... ie. there are more buyers than sellers ... then the price will be rising ("rallying" in forex jargon). Reason for this is that the larger number of buyers are willing to increase their bid prices in an attempt to encourage the unwilling sellers to sell.

The currency market is dominated by the BIG players - central banks, banks and model funds. These big players take a view on the market and then they place their buy and sell orders at specific levels ahead of time. Often you will find that a large number of players all place a large number of orders at a certain price level.

This large collection of orders around a specific price level can make it very difficult for the price action to overcome that shear volume of orders, and to "break" through that particular price area. The nett result is a "bounce" in the price action in the opposite direction away from that area.

Can you already see why you need to know where these support and resistance levels are ? ... if not, then read on.

 
What is SUPPORT ?

SUPPORT is a price level at which there are a LARGE number of BUY orders in the market.

What is RESISTANCE ?

RESISTANCE is a price level where there are a LARGE quantity of SELL orders in the market.

Thats it !!!

Its that simple.

I hope you were not expecting something complicated :-)

 
In Conclusion

Lets bring this together, and wrap it up.

SUPPORT exists BELOW the current market price, and acts as a hindrance to the price action falling any further. Think of it simplistically as the floor on which you are standing ... gravity is pulling on you but the floor SUPPORTS you and stops you from falling any further.

RESISTANCE exists ABOVE the current market price, and will also act as a hindrance to the price increasing further. Our simplistic analogy would be the roof of your room providing RESISTANCE to you from floating up any further if you were filled with helium.

 
I asked the question earlier, why is it important that you must know where the current support and resistance levels are ?

The reason is simple.

The support and resistance levels are spots in the price action where the direction can possibly reverse on you. So if you know ahead of time where they are, then you can take some profits on your trades before the price "bounces" against you at those levels.

  • If you are trading LONG then you will be keeping an eye on RESISTANCE for bounces.
     
  • If you are trading SHORT then you will be carefully watching the SUPPORT levels for the bounces.

 

In the next tutorial you will be looking at some charts and learning how to find the support and resistance levels.

Thank you for reading, and I wish you every success for your efforts.