Forex Daily Support Resistance Levels. What Are They?

If you are new to Forex trading you may never of heard of one of the most important tools in our trading toolbox, support and resistance levels.

Please let me try to explain what Forex daily support resistance levels are.

If you trade using Japanese Candlesticks as I do, and I strongly recommend that you do the same, then you will begin by looking at a trading chart that looks something like this.

Now that is all very pretty and colourful but what is it telling us about the current state of the market price?

Well, if you are using the same colour coding as I recommend then you can see when the market price is rising, green candles and when it is falling with the red candles. Apart from that not much else which will help us make a trading decision.

When you are just using a chart like this then trading opportunities do not jump out at you from the screen. What you need are some tools to make what is happening with the price movement make a little bit more sense.

This is where support and resistance levels come into play.

As the name would suggest these levels highlight on the chart where the price has reached around about the same price at the bottom of the market, we call this support and at the top of the market which we call resistance. This is shown in the diagram below.



So How Do They Actually Work?

Now, if we look at this chart in more detail, reading from left to right as time progresses, we can see the following:

The price rose up to the price shown by number 1 then fell back again. It then rose again to almost exactly the same price and stalled again at number 2. It then recovered and passed straight through and reached price point 3 before falling back.

The price found what we term resistance at points 1 and 2 at different times.

As the price continued to fall from point 3 it stopped falling and rose again at point 4, it then briefly rose again before returning to the same price shown by point 5.

This time the price found what we call support at points 4 and 5. Please note the very important fact that the resistance met at points 1 and 2 and support found at points 4 and 5 all happened at almost exactly the same price.

This is no coincidence!

Now, once support has been found at point 5 the market price shoots off upwards passing straight through the previous level of resistance at point 3 before reaching a new high price.

The price then falls again before once again interacting with a previous level of resistance at point 3 to find support at point 6.

To finish up with this very good and typical example points 7 and 8 interact with previous levels of support and resistance.

The reason this is so important to us as traders is that we are looking at potential breaks of these support and resistance levels as trading opportunities.

Just by adding 2 lines to this one chart we can see that 4 potential trading opportunities presented themselves.

A break of the support level after point 2.

A break of support level at point 3 between points 5 and 6.

A break of previous support/resistance level at points 3 and 6.

A break of that same level as the price moved back up after point 7.

Now you have to understand that these support and resistance levels do not actually exist in reality, they are artificial lines which we draw onto the chart to highlight recurring price levels.

However, despite that fact that they do not exist pretty much every trader trading at the time will be using them as a trading tool.

That is what makes some so important.

Now I realise that I may have gone into a lot of detail there trying to explain fully what the chart in the example was showing us as traders.

The bottom line is that we begin by looking for points where the price stalls, either when rising or falling, a number of times at the same price. We then draw a line on our chart showing either resistance, support or both.

We then watch the price action for confirmed breaks of these lines which will present us with a potential trading opportunity. You will notice I hope that I always refer to them as potential trading opportunities.

Sometimes the price will pass through either a support or resistance level a small amount but then move back inside. What we are looking for is a confirmed break of one of these levels. That is when we get interested in placing a trade.

I really hope that at least some of this has made sense to you. As always please feel free to comment or ask any questions that crop up.



Filed under: Tools and Strategies

Like this post? Subscribe to my RSS feed and get loads more!