We’ve already seen from the previous lesson on forex Trends and Channels how a price moves in a chart in a way that seems to suggest that if price threatens to go too high it meets resistance, and threatening to go too low it meets support.

It’s easy enough to understand – in an uptrend, the price has steadily risen so what had seemed a bargain to all the buyers a while ago now seems overpriced – the buyers (bulls) slip away and the sellers (bears) are taking their place – and the price decreases… resistance.

Similarly at a market low, a downtrend, the price has steadily dropped so now it does seem a bargain and buyers are taking over from sellers – and the price increases… support.

Go too far, too fast, and there are forces exerted to bring everything back to an equilibrium.

Of course, in the real world, resistance and support aren’t zero-width lines.
Maybe better to think of a zone of resistance, a narrow band that will contain the price – a successful defense, holding up the offense in the red zone.

But at some time, inevitably, a trend will form that takes the price through the boundaries that held it in check before – breakout.

Here’s a chart with zones of resistance and support – at different levels – until there’s a decisive breakout at the end.

Some extra points about resistance/support:

1. If you think of the price butting its bearish/bullish head against the floor/ceiling of support/resistance – the more times it tries to break out, but fails, the stronger the barrier – the more confidence you can place in these levels having some real meaning.

2. If the price does rise above a previous zone of resistance, and stays there, that resistance may now become a zone of support in the future.
Conversely, dropping below a zone of support may suggest a future zone of resistance.
There’s some psychology in amongst this to back it up, and it’s a reasonable rule to bear in mind when looking back over a chart – but not infallible, nothing’s infallible here.

3. In forex, a lot of the extended theory of support/resistance levels goes into the field of Fibonacci retracement and extension.

Some math and quite a lot of opinion, which as a personal thing I don’t entirely hold with, and certainly reckon it misleading to the beginning trader – which is why it isn’t going to be discussed here, but you can check here and here for the basics, if you’d like…

Let’s continue with another major part of forex trading online, 7. Forex Indicators →