Profiting from Support and Resistance in the Forex Market

The beauty of support and resistance lies in its simplicity. Its validity has been tested over and over again throughout history and remains one of the most widely used analysis tool of all time. It works because it is based on simple crowd psychology. And as much as we don’t like to admit it, we are basically the same irrational creatures we were a few hundred years ago.

If you could predict where the market is heading, you would be a millionaire. Unfortunately, no one has developed an indicator that will predict the future. Many indicators have been created that will give you a probable direction of the market, and among them, the concept of support and resistance has risen to the top of the pile.

Support is a price level where the market has difficulty dipping below it because the demand is sufficiently high at that level. Support levels are always on or below the current price. In other words, the support line is where the price stops falling. Here is an example:



Resistance is the opposite of support. It is a price level where the market has difficulty surpassing that price level because the selling forces are strong at that price. Resistance levels are always on or above the current price. It is where the price level stops rising. Here is an example



Strength of the Support and Resistance Line

Each time the price of the currency pair touches the support or resistance line, it strengthens its validity. A psychological barrier exists at that price which will prevent it from dipping below the support line or crossing over the resistance line.

The support and resistance are given greater weight if it happens to lie on an even number. The psychological pressures are greater at these even numbers.

Don’t Forget the Stops!

Everything we have been discussing thus far is based on history and probabilities. The price can easily dip below the support levels, and conversely, it can easily break through the resistance levels. You are a smart one, and already know how to protect yourself from a disaster. You guessed it. Always have a stop loss.

There is absolutely no excuse not to include a stop loss with your order. Forex is a game of percentages. You want to minimize your losses if the market does not go your way, and let your winners define your performance. It doesn’t matter if you lose 10 times more than you win, as long as your winning trades profit more than your losing trades in the long run.

Put this knowledge into Action

So how do all this apply to you? Well, you should always be on the lookout for support and resistance. It is surprisingly simple, yet effective way to trade. Buy near the support lines, and sell near the resistance lines. Lots of traders have successful careers based on this simple methodology. Try it out on a practice account and see how you can profit from support and resistance.  Visit www.forex-savvy.com for more articles to help you become a successful forex trader.