As promised yesterday, we are going to look at what is meant by "support" and "resistance" levels in Forex trading. These are expressions you will meet a lot, especially in connection with charting.
As you know, in the financial markets, as in most markets, prices are driven by supply and demand. Over-supply drives prices down, and over-demand drives prices up. Support and resistance represent the junctures where the forces of supply and demand meet.
SUPPORT is the price level at which demand seems to be sufficiently strong to prevent the price from falling further. The lower the price gets, the more people are inclined to buy and the less they are willing to sell. When the price reaches support level, it appears that demand will overcome supply. This should prevent the price from falling any further. However, support levels don't always hold and there is sometimes a drop below support level. This signals that sellers have lowered their expectations and are willing to sell at new lows. So new, lower support levels will have to be set.
RESISTANCE is the price level at which selling, and thus demand, seems to be sufficiently strong to prevent the price from rising further. The higher the price gets, obviously sellers have more desire to sell and there is less temptation to buy. When the price reaches resistance level, it appears that supply will overcome demand. This should stop the price from rising any further. However, again, resistance levels don't always hold.
The easiest way to identify support and resistance levels in on a chart. On a Forex trading bar chart that details the changes in the currency over time, you can see that it is possible to draw a horizontal line at the lowest place the graph reaches, and at the highest place it reaches. So with a falling graph, after it has fallen several times, it reaches a point below which it never drops. This is the support level. Similarly, with a rising graph, after it has risen a number of times, it reaches a point above which it never rises - this is the resistance level.
Obviously there is a lot more to learn about charting and about support and resistance, but I hope this has helped to clarify the basic meaning. Easy-Forex has terrific tuition on all aspects of charting, as part of their comprehensive tutorials they provide when you trade with them. And you can come to http://www.bizwrite.co.uk/Forex/forexindex.html to learn more about all aspects of Forex trading.
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