Support And Resistance Trading

Resistance levels show the previous highest price a pair has managed in a time frame
Support levels show the previous lowest price a pair has managed in a time frame
Going beyond resistance levels is called a breakout
Going below support levels is called a bounce

Why Are Support And Resistance So Important In Forex?

This article explains how traders can find support and resistance levels on the price chart. Then it reviews how traders can use those support and resistance levels to their advantage. Furthermore, it shows how to improve your trade setups at support and resistance levels. It also analyses how to avoid bad setups and trading ideas. But first of all, we need to address the main question: why are support and resistance levels important in the first place? What is the meaning of support and resistance? Let’s start with support and resistance for beginners. There are many good reasons for using support and resistance levels. Most traders will agree that they offer a lot of benefits. Let’s review some of them before discussing how to use support and resistance zones for determining decision zones. Support and resistance levels are a critical part of technical and chart analysis because of these reasons at the very least:

Bounce and breakout levels: the support and resistance levels are used to identify breakouts and bounces that have higher probability of success.
Better trading ideas: traders can improve their setups if they focus on key decision zones and points of confluence.
Time frames: the support and resistance levels can be found on all time frames. Traders can view multiple time frames to find key levels.
Confluence: the more confluence of support and resistance levels, the more chance that price action will react in a big way to the zone (either via a breakout or bounce).
Filter for avoiding trades: a trader might successfully be able to skip a trading idea that is getting very close to a strong support and resistance zone. Avoiding bad setups is just as valuable as good setups.
Valid in all environments: support and resistance levels are always useful, whether price action is trending, retracing, or ranging.
Useful for all trading styles: support and resistance levels offer benefits for a trading plan whether the trader is using price action, price indicators, or a combination of them.
Useful for trading all time frames: it is also useful whether traders are trading short-term, scalping, intra-day swing setups, or long-term.

Most traders agree that support and resistance patterns are key and with good reason (see 8 points above). Now let’s review how to determine the decision zones using support and resistance.

Trading Support And Resistance: Determining Decision Zones

First of all, we need to determine how to find the strongest support and resistance zones. A support and resistance definition is a must. Let’s first explain the support and resistance basics for beginners:

Tops and bottoms (blue and red boxes in the image below) are often key decision zones for price action. Price will either break through the support or resistance (S&R) zone or bounce at these levels for a breakout.
Another way to determine decision zones or points of confluences (POC) is by using multiple tools and indicators that highlight the same price area (green boxes). For instance, a trend line, Fibonacci level, and a moving average close to the same price level indicate a stronger support or resistance level.

Usually speaking, when price action reaches a strong support or resistance zone in Forex for the first time, price action makes some type of bounce or reversal. Traders can try to benefit from this by catching setups at the support or resistance zone. However, keep in mind that support and resistance levels can always break as well. The art is to find support and resistance zones that are strong, and hence have better odds of not breaking. Plus if a support or resistance zone is tested for the second, third, fourth, or more times, then a breakout is also starting to become more and more likely. In these cases, it could make sense to skip reversal trade ideas. These aspects could be useful for any support and resistance strategy or if traders are trading support and resistance zones.

Pros And Cons Of Trading Methods At Support And Resistance

Traders can trade support and resistance in Forex via two different approaches:

Pending order at or close to the support and resistance zone (orange box).
Market order after price action confirms a reaction at the support and resistance zone (purple box).

Both methods have their advantages (pros) and disadvantages (cons). Let’s summarize the pros and cons for pending orders:

Pros Pending Orders:

This order type provides the best entry possible because traders are entering as the price approaches the support or resistance level and bouncing spot.
Pending orders can be deleted if the price action misses the entry at the first attempt.
Once in a trade, traders can move their trade quicker to break even and remove the risk of that trade if the setup develops in their favor.

Cons Pending Orders:

Price action can break through the pending order and support or resistance level.
Trying to trade against the immediate momentum is risky as there is no guarantee that price action will stop at the support or resistance level.
Price action can tag the stop loss level and then still revert into the anticipated direction but only after the trade closes for a loss.

Now let’s review the pros and cons of market orders:

Pros Market Orders:

This entry type has more confirmation that price action is respecting the support or resistance zone because a candlestick has formed at or close to the support or resistance level.
After the confirmation, traders can still try to get a better entry price level by using lower time frames.
The price action offers a clear spot for placing a stop loss.

Cons Market Orders:

The entry price is often worse than the pending order because the price has already moved partially into that direction which provided the confirmation.
It takes longer before traders can move their trades to break even as the reaction at support and resistance needs to be more substantial (p