How to Use Support and Resistance in Forex Trading
Studying technical analysis, you will often meet the term support and resistance. In the previous article has been discussed the introduction of support and resistance and how to get or identify it. Then, how to use support and resistance for trading?
Of course, the type of chart you use will also affect how to identify and use support and resistance lines:
- On the line graph, which only plots the close price, the support line is pulled at the bottom of the close price drop and the resistance line is pulled at the top of the peak.
- On the OHLC bar chart it is better to draw the support and resistance lines so that the spikes can be ignored. This means pulling the support line at the open or close price, whichever is lower, and the resistance line at the open or close price, whichever is higher.
- In the candlestick chart, it is almost similar to the OHLC bar chart, where you should ignore the shadow or shadow and draw the support line at the bottom of the real-body candle that forms the low level, and the resistance line at the top of the real-body candle that forms the top .
- The support and resistance lines on the Point and Figure charts are the easiest to draw because the support line is right at the top and the resistance line is right at the bottom of the decline.
There is a very good reason why support and resistance lines should be pulled at open and close prices rather than at the high or low of a bar or candlestick. The closing price represents the consensus for the bar while the high price spike or the low price indicates a failure to push the price to higher or lower. This failed attempt does not interest many other traders to drive prices and therefore is not a significant marker of what traders believe is a fair price at the time. And traders want the support and resistance line drawn to be at a significant level.
When the price moves back to the support or resistance line, it is said to be testing the support or resistance. If the support or resistance line holds, and is not violated or penetrated, the test is said to have failed. The more often the support and resistance lines are tested and failed then the support or resistance line, it is increasingly significant. If the support or resistance line is significant, they provide an incoming signal when the line is tested and failed. And also when a test it breaks or breaks the support or resistance line.
Less significant support and resistance lines do not provide good entry and exit signals but are more useful for identifying chart patterns and for use alongside technical indicators.