13. Support and Resistance

You gotta love the trend

Buyers and sellers are in a constant tug-o-war in the forex market. Buyers drive the prices of currency pairs higher, and sellers drive the prices of currency pairs lower. If you want to be profitable in your forex investments when buyers are in control, you need to follow the trend and be a buyer too. If you want to be profitable in your forex investments when sellers are in control, you need to follow the trend and be a seller too. Seems pretty easy, right?

Well...almost.

Most forex investors are able to make money when a currency pair is trending in one direction or another. The trick is holding onto your profits and making money when the price of the currency pairs decides to turn around and start moving in the opposite direction. How many times have you asked yourself the following:

"I've made some money on this trade. Is it time to get out?"

"This trend has been going for a while. Can I still jump in and make some money?"

"It looks like this currency pair is going to turn around. When should I enter my trade in the opposite direction?"

If you can accurately identify the turning points for the currency pairs you are watching and then act on them, you can drastically improve your trading results.

Support and resistance levels are price ranges that can cause currency pairs to stop moving in their current direction, turn around and start moving in the opposite direction.

Support levels act like a floor for a currency pair. As the price of the currency pair drops down to a support level, it tends to stop, turn around and move higher.

Resistance levels act like a ceiling for a currency pair. As the price of the currency pair rises up to a resistance level, it tends to stop, turn around and move lower.

Support and resistance levels are not exact price points---they are price ranges. A good friend of mine has a great analogy for support and resistance levels. He says when you draw a support or resistance level on your chart, imagine you are drawing it on with a big fat crayon, not a fine-point pen. That way you won't fool yourself into believing you have identified the exact price at which a currency pair is going to turn around and start moving in the opposite direction.

As you start identifying support and resistance levels on your charts with your big, fat crayons, it is important to remember that support and resistance levels can be either horizontal or vertical levels.

Horizontal support and resistance levels form as the price of the currency pair falls or rises to the same price level multiple times.

Diagonal support and resistance levels form as the price of the currency pairs falls or rises to new lows or new highs, respectively.

Support and Resistance Illustrated

Watch the video below for a detailed look at support and resistance levels, and some thoughts on where to draw lines.

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