Below I have outlined the most Commonly Used Support and Resistance Areas that forex traders use for technical analysis. In technical analysis, the forex trader attempts to understand the market by how price moves, as well as using some indicators. Support and resistance make up the most core and meaningful portion of technical analysis. Below are the four most commonly used areas.
There are a number of variations on the moving average. For the sake of this article, I will keep it simple. They all essentially do the same thing – take the average of the price history and average it together. The higher the moving average, the more candles are used for the average.
So, a moving average of 200 takes the last two hundred candles and averages the price together. Smaller moving averages tend to move and respond to the market faster, while bigger moving averages tend to move slower. It takes quite a bit more data in terms of candles to change the shape of bigger moving averages. A moving average is usually represented as a curved line on the chart, and can be obtained from any timeframe. It is a form of dynamic support and resistance and used frequently by traders.
Horizontal Support & Resistance:
These are manually placed lines on the chart that a trader will use to understand an important area in the market. It is very common that an area that historically was support or resistance will once again be support or resistance in the future if/when price approaches it. Some very common areas to look for horizontal s/r is around whole numbers, or where price got to an extreme and turned around sharply in the other direction.
This is one of the few “forward-looking” indicators on the chart. Although there is no guarantee that price will indeed respect a horizontal s/r when it reaches it, for the most part, a well-placed horizontal s/r line will cause the market to react in the future again at that point.
This is another type of a commonly used support and resistance line also placed by the trader. Think of it as a horizontal s/r that tilts to follow movement up or down because price tends to move in one direction or another. The trendline is used to identify the “trend” of a pair and provides a dynamic support and resistance area. To create the trendline, we must connect either highs or lows together as price moves in either an upward or downward direction. We can identify “breakouts” or trend reversals if certain trendlines are broken. Trendlines on higher timeframes tend to be more important and signify more than on smaller timeframes.
Fibonacci or “fibs” as they are known to traders, are a tool used to identify ratios between price distances. They are based on the mathematician by the same name. He identified certain ratios appearing all over the place, from wave size, to flower petals, to the human body. The market moves much of the time according to the same ratios found in fibs. The easiest to understand is the 50% level, where price retraces 50% of the distance it moved initially. Fibs allow us to identify good s/r levels ahead of time for pullbacks, or extensions for targets. They can also be used to protect stops and alert the trader if a certain fib level has been broken that the move is essentially over.
Commonly Used Support and Resistance Areas
So above are four of the most commonly used support and resistance areas by forex traders. If you plan on doing any sort of technical analysis in forex trading, then you will need to understand at least these four types of support and resistance. This list is not exhaustive, but this is a good place to start your understanding of support and resistance.