Forex Support and Resistance

Forex support and resistance levels are the foundation of any good trading strategy. Whether you’re trading a simple price action strategy or something more complex, these levels form the road map to trading success.

Although the topic of support and resistance is arguably the most common among Forex traders, it is also perhaps one of the more misunderstood. It seems that most Forex traders falls into one of two categories when it comes to drawing support and resistance levels:

  • Those who draw too many levels
  • Those who don’t draw enough levels

But let me be clear. Drawing the “correct” support and resistance levels on a chart is one of the more discretionary aspects of trading Forex. Therefore it isn’t a surprise that many traders struggle in this area.

Because it’s more discretionary, we can think of drawing support and resistance as a combination of an art and a science. So while there is a preferred way to go about drawing these levels, it isn’t restricted to just one approach.

In this lesson we will discuss the basic concepts of support and resistance from both a fundamental and technical perspective.


What is Forex Support and Resistance


Support and resistance in the Forex market is best explained using the concept of supply and demand as well as human psychology. Let’s first take a look at the fundamental side of support and resistance as it relates to the Forex market.

Supply

Any resistance level in the Forex market starts with an increase in supply. In other words, sellers who feel that the current price is at a premium and wish to sell in hopes for a lower future price.

Notice how the number of units available increases as price goes up in the chart below. This illustration of supply represents the most basic element of a resistance level in the Forex market.

Forex supply curve

Demand

Any support level in the Forex market starts with an increase in demand. In other words, buyers who feel that the current price is at a discount and wish to buy in hopes for a higher future price.

Notice how the number of units available decreases as price goes up in the chart below. This illustration of demand represents the most basic element of a support level in the Forex market.

Forex demand curve

So what does supply and demand look like when drawn on a simple price chart?

forex support and resistance level on the daily time frame

As you can see from the chart above, we have a very well-defined Forex support and resistance level by which we trade from. This is how we can use the concept of supply and demand to our advantage as price action traders.


The Psychology Behind Support and Resistance


There are two sides to a coin, and the topic of Forex support and resistance is no exception. There is the fundamental approach, which we covered above using the concept of supply and demand. Then there is the technical approach, which is my preferred method of using Forex support and resistance levels.

The technical approach to support and resistance simply says that if enough traders see the same level in the market, then that level is likely to be respected. This is why I always say that the more obvious a support or resistance level is, the more conducive it is to an effective trade setup.

You may be thinking that this sounds a bit like a self-fulfilling prophecy, in that we (as traders) see a support or resistance level and therefore expect a reaction. Thus giving life to that very outcome. And you would be absolutely correct in thinking about the technical elements behind support and resistance in this way.

Let’s take another look at the GBPNZD chart above, but this time we’ll examine the level from a technical standpoint.

forex support and resistance level

As soon as the resistance level formed from the two swing highs, a technical trader should expect that level to now hold as support. Of course we always want to see a price action signal as confirmation, but the general idea is that a broken resistance level becomes new support. We can therefore use that new support level as the foundation for a potential trade setup.

For more information on this topic, see How to Properly Draw Support and Resistance Levels.

 

5 comments
Charity Burr says

OMG! You are going to get tired of seeing my name on these questions. Regardless. When trading pin bars (or anything for that matter) I think I am placing my S&R to close. When I look at your charts in the lessons and on Pinterest I try to figure where I would probably place my TP based on S&R but they seem to be closer than yours. This of course throws off the 2R which keeps me from placing trades. I even decided to only enter trades using the 50% retracement idea. I have been a fan of Pivot Points in the past but they don’t really seem to fit anymore. Not when I am only trading Price Action. How do I accurately draw Support and Resistance lines? Is there a guideline that I don’t know about? Thanks

    Justin Bennett says

    Hi Charity,

    Have you seen the lesson at the link below on how to properly draw support and resistance levels?

    https://dailypriceaction.com/free-trading-lessons/how-to-draw-support-and-resistance-levels

      Charity Burr says

      Yes, I have not only seen the lesson but printed it out and it is in my binder with other lessons. Mine still seem to be off and it throws off my 2R standard which I refuse to abandon. Any help will be greatly appreciated. If you have no answer I understand. I will figure it out and let you know. 🙂

        Justin Bennett says

        Hi Charity,

        I have an answer, though it probably isn’t the one you were hoping for. The answer is practice. I tell my members all the time that becoming good at identifying support and resistance levels is half the battle. If you can get that down, the rest of it will fall into place.

        That said, drawing these levels is not all that different from identifying technical patterns. It’s all about taking a step back and finding the most obvious levels on the chart. If a level doesn’t jump out at you right away, it probably isn’t worth marking.

        Hope that helps.

          Charity Burr says

          Thank you! I am not afraid of practice. I like to be prepared and sometimes practice, well most of the time, practice is the best preparation. Thanks again for taking the time to answer my question.

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