Support and resistance: The key to Price Action Trading Forex Lesson
Before you buy yourself an expert advisor or decide to trade yourself, it’s important to understand what traders mean by Support and Resistance zones, especially if you’re looking for a Forex EA whose working is based on price action trading.
Note: this post can help you decide whether you should learn Forex trading or go the easy route, which entails buying expert advisors or Forex signals. Finally, you can also learn how to make money with Forex without trading here.
These two points in a chart are the key to any price action trading lesson. Any Forex lesson will teach the meaning and importance of Support and resistance zones respectively.
When a market changes or reverses from its original direction, it will form a peak or a trough at the point of reversal.
Support and resistance levels can form a trading range. Apart from this, they can also appear in trending markets when price retraces and forms swing points instead.
The reason why price action traders cannot do without support and resistance zones is because price often tend to respect these zones. Unless a support or resistance zone is broken, then a trough or a peak zone can easily signify that one side of the market has lost control and the market is likely to change direction.
Support and Resistance: Price action trading lessons that you must learn
(a) Support and resistance levels in a trading range
When you draw two horizontal lines on a chart, one touching the peak(s) and the other touching support zones (as shown in the image below), you will end up with a trading range which can easily present good trade setups.
In the above example, a resistance zone was formed, then price reversed to form a support zone before heading back to the resistance zone a second time. This action formed a trading range.
But finally, price broke the trading range and headed upwards before retesting the previous resistance line. This previous resistance line is now the new support.
(b) Support and resistance levels in a trending market
Support and resistance zones can also form in a trending market as occasional re-tracements form and leave behind what may look like a peak or a trough (depending on the direction of the trend).
In an uptrend with retracements, price will form peaks and in a downtrend, it will leave behind ”troughs” as it resumes the main trend.
Now, when looking for retracements in an uptrend, you will easily be able to draw a support line which touches old peak formations after price breaks above the zone. The peaks often form a good support when price breaks above them and is retesting the level before resuming the main upward trend.
On the other hand, price will swing to form occasional retracements in a downtrend. This action leaves behind trough formations. When you draw a horizontal line touching the end of these swing points, you will have drawn a support line. It remains a support line until, of course when price breaks past it to continue with the main downtrend.
The above screenshot is a good example of how a chart can be labeled to show support zones.
How to trade support and resistance zones as a price action trader
Traders who don’t rely on expert advisors will often seek to watch how price behaves over time. They cannot do without support and resistance levels on a chart. It would be very difficult to visualize where to put a take profit or a stop loss.
When the market forms a peak at a resistance zone and reverses sharply, a trader may look for high probably entry points within the trend. When price bounces on a support zone, a trader may look for good trade setups within the trend.
What they could be aiming at is a good risk to reward ratio which price action trading (with regards to these points) offers.
One of the things that you might look for when price is on a key support or resistance zone is a pin bar for instance.
In the example above, I marked the point with a green arrow to show you two pin bars which could form at a resistance zone for example. One pin bar with a long tail is often a good indication that the bulls pushed price higher and then it was resisted. The bears are about to take over.
The above example shows two pin bars (with tails that are not very long) forming at the marked area to signal that the bears are about to take charge. Whether it’s one or two pin bars forming at a critical point like this, it will always mean that a reversal is on the way.
The next example shows pin bars forming at an areas which is considered a support zone.
When two or more pin bars form at a support area, you’d be essentially looking for a buy trade setup. These two tails for instance show that the bears tried to push the price below the support line and were later overpowered by the bulls who are now intending to push the price higher. It only means that price is reversing as seen in the example below.
Entering a trend after it breaks a resistance zone and a pin bar is formed
The key to Price Action Trading Forex Lesson teaches the importance of watching pin bars that form after resistance or support levels.
In the above example, price was moving in an uptrend. It formed a peak in the ”previous swing high”, then dipped before moving higher thus breaking the previously marked level. It retested this line (which is now considered a support line) before breaking it and making an attempt to remain below it. But then the bulls resumed the trend, and this time, it broke the resistance line with a big, solid Bullish candlestick.
At this point, you should be ideally sitting with your hands folded, waiting to buy the market when you see a pin bar.
In the above example, a long pin bar with a long tail formed, which signaled that the bulls were in control. When you see such a setup, you should be assured of the fact that price will continue to move upwards.
I hope you can see how support and resistance is the key to Price Action Trading Forex Lesson. You do not need any complicated lessons apart from learning how to recognize these levels and entering the market based on a pin bar or some other trade setup formation.
Note: those who don’t want to go through the hustles of learning support and resistance levels in relation to price action should buy expert advisors or Forex signals instead.