Understand Forex Trading Support and Resistance

by Trading 101     Jul 16, 2019

When you're getting started in Forex trading, the movements of the market can be all be a mystery. At many times, it will seem like the market and values of currency pairs move seemingly completely at random. As a beginning trader, one of the biggest challenges that you will have to come to terms with is determining when is the right time to buy or sell currencies to maximize your profit. Sell too early and you risk losing out on profits. Sell too late and you'll miss the pinnacle of your currency's value, and you might even end up losing money. It is this uncertainty that sends many beginning Forex trading hopefuls away from the market for fear of investing in a currency that will never rise in value. However, with a bit of research and planning, it is possible to take steps to accurately predict when the value of a currency will rise and fall by analyzing past currency data. Two of the most important factors in this equation are the concepts of support and resistance.

The concept of support and resistance is similar to the laws of supply and demand, with a dash of research from the concepts of market cycles. As prices for a currency go up, they will eventually hit a point where Forex trading investors believe that it is no longer worth their time or money to invest, and they will naturally cease buying the currency. This is called the "resistance" phase; the term comes from the resistance of investors to continue spending money acquiring the currency because it's no longer a good deal. Following the resistance phase, the currency will drop in value over time because when no Forex trading investors are purchasing the currency, the demand lowers. After a continuing period of resistance, the currency will eventually move into a period of "support." Think of the support period as you would a store putting their out of season merchandise on sale. "Shoppers" (in this case, Forex trading investors) see the sale, and decide that even if the currency is not one they were previously interested in, they now have an incentive to invest because it is simply too good of a deal to pass up. During the support period, the value of the currency will continue to rise in value because demand from investors is high. The price of the currency will continue to rise and rise until it hits the resistance point, and the cycle repeats itself.

So what are the monetary values of the resistance and support points? There is no one simple answer to that question because it will be different for every currency. Some country's currencies will have higher resistance points thanks to a higher GDP or stability, and some will have lower support points thanks to patterns of fluctuation that make the currency an unsafe investment. The only way to tell where your support and resistance points will be is to analyze past currency charts for the currencies you are interested in Forex trading.

Forex trading is not a get-rich-quick scheme, nor is it a way to become a millionaire overnight. Successful Forex trading requires careful considerations and research, coupled with the right education. However, if you put the time and thought into making smart money movements, you may find that it's relatively simple to predict when the currency pairs in which you have invest money will change in value. Before you even begin to consider trading, make sure you get your hands on a good set of educational materials, like the free library and resource list available from Trading 101. After all, failing to prepare is preparing to fail, especially when Forex trading.

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