Support and Resistance
Support and resistance are normally discussed within the context of supply and demand. Supply and demand is the fundamental principle of economics. The law of supply and demand is pretty easy to grasp. If demand increases relative to supply, price will rise. Conversely, if demand decreases relative to supply, price will fall. When supply and demand are balanced, price will remain sideways.
I am surprised that many traders do not understand this basic powerful concept. I honestly feel that it would be almost impossible to trade consistently profitable without a fundamental understanding of support and resistance. I personally view support and resistance as my GPS. It helps me to navigate through the chaos.
What is Support?
Technically, support is synonymous with an established low. When prices fall to an absolute minimum, demand causes price to rise. Remember the law of supply and demand? As more traders “demand” the currency pair, prices rise. This concept can be easily elucidated when viewing the price wave model.
Using the price wave analysis method, we know that an uptrend has higher highs and higher lows. Conversely, we know that a downtrend has lower highs and lower lows. Every low that is established is called support. The terms support and low are often used interchangeably. I like to imagine support as a floor. It sits beneath price. For practice, pull up any chart. Analyze the lows of any uptrend and downtrend. This exercise will help you to train your eyes to identify support.
What is Resistance?
Technically, resistance is synonymous with an established high. When prices rise to an absolute maximum, lack of demand causes prices to fall. Remember the law of supply and demand? As more traders “sell supply”, prices fall because of lack of demand. This concept can be easily elucidated when viewing the price wave model.
Using the price wave analysis method, we know that an uptrend has higher highs and higher lows. Conversely, we know that a downtrend has lower highs and lower lows. Every high that is established is resistance. The terms resistance and high are often used interchangeably. I like to imagine resistance as a ceiling. It sits above price. For practice, pull up any chart. Analyze the highs of any uptrend and downtrend. This exercise will help you to train your eyes to identify resistance.
Identifying Support and Resistance in Forex Trading
By now, we know that support is tantamount to an established low, and that resistance is tantamount to an established high. But for trading, this is not good enough. Highs and lows get breached all the time. In trading we look for a failure off of a previous high or low to establish “true resistance or support.” Double tops and bottoms are classic resistance and support defining patterns.
If you apply the price wave analysis method on one chart long enough, you will notice how the highs and lows of one price wave may converge with the highs and lows of another price wave. This is how support and resistance is naturally formed. To gain a better understanding, please watch the video on support and resistance. This concept will make sense visually.
In the first video, we talk about the convergence of price waves that naturally form support and resistance. In the second video, we bring up a price chart to apply the theory into practice.