Forex Academy | ForexGen

The concepts of support and resistance are undoubtedly two of the most important and highly discussed attributes of technical analysis and they are often regarded as a subject that is complex by those who are just learning to trade

This article will attempt to emphasize the complexity surrounding these concepts by focusing on the basics of what traders need to know in order to be a good trader. You'll learn that these terms are used by traders to refer to price levels on charts that tend to act as barriers from preventing the price of an asset from getting pushed in a certain direction.

Most experienced traders will be able to tell many stories about how certain price levels tend to prevent traders from pushing the price of an underlying asset in a certain direction.

Let’s just take a look at this first.

Most technical traders incorporate the power of various technical indicators such as moving averages, to aid in predicting future short-term momentum, but these traders never fully realize the ability these tools have for identifying levels of support and resistance. As you can see from the chart below, a moving average is a constantly changing line that smoothes out past price data while also allowing the trader to identify support and resistance. Notice how the price of the asset finds support at the moving average when the trend is up, and how it acts as resistance when the trend is down.

Determining future levels of support can drastically improve the returns of a short-term investing strategy because it gives traders an accurate picture of what price levels should prop up the price of a given security in the event of a correction. Conversely, fore seeing a level of resistance can be advantageous because this is a price level that could potentially harm a long position because it signifies an area where investors have a high willingness to sell the security. There are several different methods to choose when looking to identify support/resistance, but regardless of the method, the interpretation remains the same and it wont change, it prevents the price of an underlying from moving in a certain direction.