There are many different Forex trading strategies. However, there are some basics of reading a price chart that you need to know before you can move on to learning any one strategy in-depth. Let’s cover the basic building blocks of trading the Forex market from a technical analysis approach:
• Support and Resistance levels – How to identify and plot them
Support levels are created as a market turns higher. So, if a market
is moving lower for example and it then changes direction and begins
moving higher, it either has created a level of support or bounced off a
previously existing level of support.
Resistance levels are created as a market turns lower. So, if a
market is moving higher for example, and it then changed direction and
beings moving lower, it either has created a level of resistance or
bounced off a previously existing level of resistance:
Identifying and plotting support and resistance levels
is by no means an exact science. Instead, it requires the use of the
discerning human eye and a little bit of brain power…don’t be worried
though, it’s really not that difficult to become proficient and
confident in drawing support and resistance levels on your charts.
In the chart below, we can see the daily GBPUSD chart, with all the relevant support and resistance levels drawn in:
Now, one important point that I want you to know about support and
resistance levels is that they are not concrete. Many traders seem to
think support and resistance levels are concrete and that they should
never trade a setup if there is a support or resistance level close by,
this can result in them getting analysis paralysis and never entering a
trade. While it is true that you need to take into consideration the key
support and resistance levels in the market, you also need to look at
the overall market condition. You see, in trending markets, support and
resistance levels will often be broken by the trend momentum; so don’t
be afraid of support and resistance levels, as they will often break.
Instead, watch these levels for trading signals. You see, when a Forex
trading signal like a price action setup forms at a key support or
resistance level, it is a very high-probability even to take notice of.