In order to have a lucrative and flourishing trading strategy, it is important that you understand lively resistance and support levels.
Changes in the foreign exchange markets are caused by supply and demand depending on whether the value of currencies have increased or decreased. However, when supply and demand are not able to work together, the currency can end up with support and resistance points. If the market is flooded with too much currency, you can find terms like sell, bearish, and bears being used. If the market is reacting from a lack of currency, then terms like buy, bullish, and bulls are more common. In situations where the market moves sideways instead of up and down, then demand and supply are equal.
Support and Resistance:
The support level is the point at which it is believed that demand will be high enough to keep the value of currency from decreasing any lower than it already has. As the price of a currency declines and that currency becomes cheaper and cheaper, there are fewer people selling that currency. However, there are going to be more buyers since the price has become more tempting. When a sufficient number of buyers have purchased that currency, the price will stop decreasing and will create a level of support. Investors will use this new level to decide where to put a stop loss. At this point, the support level will become the new resistance level.
The level of support on this chart begins at 1.5960. It never breaches that level even though it bounces off of it a number of times.
Resistance occurs when the price of a currency meets an obstacle while it is increasing. At this level, more sellers are buying a currency and have stopped the price of the currency from increasing any further. At this level, buying interests have faded because investors believe that the price is too expensive. Supply increases and demand decreases so that the price will hit the new resistance level. A new support level is produced when the price increases above that resistance level. Once this occurs, the price will often increase since more investors will be entering the market.
Moving averages are used by some traders as support and resistance levels. This can result in a successful trading strategy. Round numbers, such as 1.4900 and 1.6500 can be active support and resistance levels. Draw trend lines in order to analyze where support and resistance levels could exist.
How do you apply interpreted support and resistance levels for trading purposes?
If a trader buys at the support points and sells at the resistance points, they would make a number of successful trades.
Analyzing support and resistance levels can result in a successful and profitable trading strategy.