Support and Resistance are often used as a reference for forex trading analysis. However, what is Support Resistance? How to determine it?
In forex trading, the price formed actually follows the mechanism of buying and selling power in the market.
Therefore, there are certain levels that traders indirectly agree on as price reversal points, namely when selling power weakens (while buying power strengthens) or when buying power weakens (while selling power strengthens).
These price reversal points are called Support and Resistance in forex. Here’s the full review.
Also read: Understanding Time Frames in Forex
The Definition of Support Resistance in Forex
When traders think the current price level is too high, they will tend to end the buying action by making profit-taking. This action causes the price to fall after reaching a certain high level, which is then referred to as resistance in forex.
On the other hand, there is a price level that traders consider low enough, so those who sell will take profit. As a result, the price will correct up. This is the forerunner of Support.
For more details, take a look at the example Support Resistance on the USD/JPY chart below:
You may have heard the quote ‘buy low, sell high’ (buy low, sell high). However, novice forex traders are often confused about where the low and high prices are. Well, Support Resistance in forex is the answer.
Resistance is an area that is created when the price stops rising, then reverses down. Resistance acts as an ‘upper limit’ that blocks further price gains for the time being.
While Support is an area that is created when the price stops declining, then reverses up. Support becomes the “lower limit” which prevents the price from falling further for the time being.
If we can find out these Support Resistance points, then we can know when to buy, when to sell, and when to take profit. However, how to identify Support Resistance is not as simple as looking at the highs and lows.
How to Determine Support Resistance
There are various ways to determine Support Resistance in forex. The most common way is to look at the highs and lows on the price chart, as shown in the example above.
However, forex traders also often take advantage of the help of technical indicators or certain price movement mapping methods. Here are some examples:
1. Determine Support Resistance Using Bollinger Bands (BB)
Bollinger Bands technical indicators can be found on all trading platforms provided by forex brokers.
The trick, on the trading platform, is to open the price chart of the currency pair you want to trade, then insert the Bollinger Bands indicator.
Later two Bollinger Bands lines will appear on the chart like two bands flanking the price movement.
Notice how the price tends to reverse down after reaching the upper limit of BB (Resistance), then reverse up after reaching the lower limit of BB (Support).
The lower and upper limits seem to fluctuate, so they are also called dynamic Support Resistance.
2. Determine Support Resistance With Pivot Points
Pivot Points are Support Resistance points that are calculated based on the highest price (High), the lowest price (Low), and the market closing price (Close) in the previous period. Pivot Point calculation formula:
Pivot Point (PP)= (High + Low + Close)/3
Support Resistance levels are then determined as follows:
First support (S1) = (2*PP) – High
Second support (S2) = PP – (High – Low)
First resistance (R1) = (2*PP) – Low
Second resistance (R2) = PP + (High – Low)
You can calculate Pivot Points manually. However, you don’t really have to use a formula and calculate it yourself.
If you understand the Pivot formula, it will be better, but usually, on the trading platform, there are indicators to determine the pivot automatically.
Also read: What is Forex Market Sentiment?
Alternatively, you can get Support Resistance values by simply entering the previous day’s High-Low value (for Daily Pivot) in the Pivot Calculator provided by forex.bacalagers.com.
The Pivot representation on the price chart is as follows:
Observe the lines with letter markers R2, R1, P, S1, and S2 on the left side of the graph. That is Support Resistance is determined by the calculation of Pivot Points.
After turning at the Pivot point (P), the price moves towards S1. If the price drops again later, then it will likely reach S2.
Meanwhile, if it turns out that the price turns up, then it can return to the Pivot point again. When trading, R2, R1, P, S1, and S2 can be used as an initial reference for opening a trading position (open position/entry), profit target, as well as the maximum loss limit (Stop Loss); Because at those points a price reversal is most likely to occur.