Forex traders use various techniques when analyzing currency price charts. One of the most important concepts in technical analysis is support and resistance. Resistance simply refers to price levels that a currency pair does not often exceed. Support is price levels that a currency pair does not often move under.
What Causes Resistance and Support?
The primary reason why currency markets behave in this way is due to supply and demand as well as market psychology. The number of buyers usually exceeds sellers at support levels. This results in upward pressure on the price of a currency pair, causing the price to move back upwards after approaching close to the support level. The opposite is true regarding resistance levels, where the number of sellers is more than buyers, which causes price to move back down.
According to technical analysis theory, when a support or resistance level is broken, the roles of support and resistance reverse. When price breaks below a support level, the same price level will then become a new resistance level. On the other hand, if price moves above a resistance level, the same level will likely become a new support level. This generally happens only when a strong price movement shifts the market into a new range.
It is important for forex traders to pay attention to support and resistance analysis since it can be an essential part of spotting trends or potential trend reversals. This can be helpful for traders to determine good levels to enter and exit the market. However, currency traders should also keep other factors, such as economic fundamentals and market sentiment, in mind when analyzing markets.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.