Support and Resistance Lines in FOREX
Whether you are just getting started in FOREX or you are a fairly experienced investor who is looking to take things to the next level, you will find that there are several tools you can use to make the process a little easier. We will not lie and tell you that these are easy concepts to figure out, and they still will not make you become a multi-millionaire overnight, but you are certainly better off to at least try and use these than you are to continue guessing where you think currency values will go. One really effective tool to help you analyze the market are what are known as support and resistance lines.
Trend Line Basics
Before we can go too in depth with the support and resistance lines found in the FOREX market, it is fairly important for you to have a basic understanding of trend lines because these are essentially the route version of support and resistance lines. With trend lines, you have an uptrend line and a downtrend line. With uptrend lines, you will have an inclined plane that defines the bottom, or corrective phase, of an increase in prices. With downtrend lines, you will have an incline plane that slopes downward from the peak of the uptrend plane, and this plane defines the top of the price increases when the overall prices are actually declining. There are two things used to define the whole price of both the bottomed-out prices and the highest prices, which are known as support and resistance lines.
What are Support Lines?
To make things as simple as possible, think of support lines as a floor that is built as steadily as possible. You might overthink things and realize that, under severe circumstances, your flow could, in fact, fall out and send you below the foundation of your home, but the actual occurrence is not likely. Like the foundation example, the support lines on a FOREX chart indicate where people realize prices could technically drop below, but the prices continue to stay above it. It essentially acts as a safety barrier. For example, the support line might be set at $1.00:$1.03, but the actual figures might never fall below $1.00:$1.031.
What are Resistance Lines?
To make resistance lines easy to understand, think of them as the roof of your house. If something ever happened to gravity, all of the belongings in your home would go flying through the roof, and so would you. Fortunately, in the case of your home’s roof and your belongings, this is unlikely to happen. The same holds true when investors have speculated that a certain transaction is going to exceed a certain ratio, but the “roof,” or in this case, resistance line keeps it from happening. For example, the resistance line might be $1.00:$1.03, but the numbers would never exceed $1.00:$1.029. Support lines are typically drawn as a horizontal line, or plane, along the apex intersection of the uptrend and downtrend lines, while resistance lines are a horizontal line drawn along the bottom of the uptrend and downtrend lines.
How to Use Both to Become a Better Trader
Like most technical investing tools, you need to combine two pieces of analysis together to receive any benefit, and the same holds true when combining support lines with resistance lines. When you look at support lines, you can get an idea of where investors have an outside speculation prices may go, but you can clearly see that they are nearing the mark but never actually exceeding it. This can be used to show you that prices will likely never exceed a certain mark. You can use the data demonstrated by resistance lines to realize that, against most odds, prices will never drop below a certain level. When you combine the two, you can get an idea of where the price floor is and know how high the price could potentially reach in a very realistic sense. The complete data will, in theory, tell you when the most opportune time to buy is, when prices will not go any lower, and when the best time to sell is, when prices likely will not go any higher; both according to data over a very specific period of time.
While support and resistance lines can help you become a better trader, it will take you a while to do the necessary research to find the trends. You should not simply give up if you cannot figure out how to use these two concepts right away as they are a little tricky for even seasoned investors. Now that you know a little more about the support and resistance lines, hopefully you will have a leg up on the investors you are competing against in the FOREX market.
Leave your comments
FX Bonuses & Promotions
Need a Forex Broker?
Fill in your contact details here and a top Forex broker will contact you shortly!
Connection 2 Forex Newsletter
Stay Updated with our: