The more you learn about trading the more you get familiar with value of learning the different aspects of price action. In fact, learning different price action techniques could be enough to make you a full time trader.
We discussed in the past on our blog the game of trading and what is going on behind the scenes that makes the market move…
This article we want to dig little deeper into price action and discuss what is going on at Support and Resistance areas. If you want to check out a support and resistance trading strategy go ahead and go here.
Support and Resistance Forex Defined: How to find support and resistance in day trading.
These areas on your chart will form what’s called “barriers” to the price movement.
Support acts as a floor that limits any further downward movement.
Resistance, on the other hand, acts as a ceiling limiting further upward movement.
Support in the past can mean resistance in the future. Same thing goes for resistance. The Resistance in the past could mean support in the future.
Both are formed through the actions of the traders in the current market.
So the million dollar question is, What causes the price the “hit” these certain levels and bounce off if it?
And what causes the old areas of support to become the new areas of the resistance.
It’s simply summed up as traders making trading decisions.
lets explore this…
This is a function of how we are wired as humans.
The decisions to buy or to sell are made by analyzing the current price against previous areas which cause a emotional response to traders.
They fear of missing out of on opportunity so they either buy or sell at these areas of support or resistance.
So the support area is basically summed up as the demand overcomes the supply limiting the price to go down any further.
Then resistance, is the area with the supply has been overcome with demand which limits an upward price movement.
That is were you see a ‘Barrier” form.
You will sometimes notice that a support/resistance area isn’t exacly a straight line which is why it is called an area. What happens is traders will make different decisions at different prices in this area.
Never assume these areas will hold, however, they should always be areas of interest and you should take note of it when you see them.
See an example below of resistance in the past acting as support in the future:
This was taken from our Price action Pin Bar strategy which we talk a lot about this very topic.
Finding these “areas” will help you make better trading decisions when the price action goes to these levels.
Be the smart trader and wait for confirmation before you trade a breakout of support or resistance.Also read about Scaling in and Scaling out in Forex.
Many will get sucked into trading these areas too early because of fear of missing out on a trade. There are a few support and resistance indicators out there so do a quick search them and you will find one that should fit your trading style.
Thanks for reading!
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