Support and resistance are the prominent indicators that are widely used by traders in Forex trading. The role of these indicators is to identify the price points on a chart whether the probability favors a pause or reversal of the current trend.
The ‘support’ level is where the price hits the trough point, stops falling, and bounces back up, while the ‘resistance’ level is where the price reaches its peak point, stops rising, and dips back down.
How does it work?
Imagine you are in a room with a ceiling and floor. The floor is the ‘support’ level while the ceiling is the ‘resistance’ level. When the currency price appreciates (demand rises), the resistance level will act as the ceiling so that the ball does not break through it but bounces down.
By the same logic, when the price of the currency depreciates (supply rises), the support level will act as the floor to catch the ball. These phenomena can often be seen in a chart and occur on similar price points, making it easier for traders to identify the levels.
Simply put, a support level represents a price level where the price points have difficulties breaking below; a resistance level represents a price level where the price points have difficulties in breaking through. As such, these levels can come in handy to predict the behavior of market participants once the prices reach the respective levels again.
However, traders should understand that it is a common sight that the role of the level can be broken and changed in times of uncertainty or when the supply and demand levels have shifted. This situation often results in the price breaking below or above the levels.
To sum up, these support and resistance levels are seen by traders as a vital indicator when it comes to determining market psychology and supply-demand. Mastering the skill of identifying the level can be drastically useful in helping traders to choose the best time for entering a market, as well as putting their stops and limits.