Support and Resistance in FX Trading
Trading on support and resistance is a common strategy used in situations where the market moves within defined cycles. Generally speaking, it takes some extra circumstance to push a currency pairing past a previous high or low point, and in using these as markers for determining the relative value of a currency pairing, you can better judge what the market is likely to do next. The idea is that when the market is approaching its high price point, or the point of resistance, where it is considered to be overpriced, the market will soon fall.
Likewise, the reverse is true for support levels, which are when a currency trades down so low as to be considered underpriced. When a currency pairing is approaching its resistance or support level, it’s worthwhile keeping an eye on the market to jump on board as soon as there is a market reversal. But the benefits of getting in at the ground floor on a price correction can be potentially hundreds of PIPs, depending on the width of the cycle and the duration over which you intend to hold the position.
What You’re Looking For
If you’re looking to trade on support and resistance lines, you need to firstly establish where these sit for your chosen currency pairing. This relies on the ability to frame and understand technical data through looking back to find previous highs and lows, and requires an understanding of the time period over which you’re examining. For shorter-term trades, looking back at weekly highs and lows might be enough, or possible even daily highs and lows depending on how short-term you’re prepared to go. For longer trades, it’s important that you look at price performance over a wider period of time, in order to best get a picture for whether you’re nearing an actual point of resistance or support or just a temporary snag in the market.
Which Trader Does This Suit?
Support and resistance trading relies on a basic understanding of technical analysis. While this certainly isn’t beyond the scope of new, inexperienced traders, it tends to be regarded as the preserve of the more experienced, although as strategies go it tends to please all. Essentially, all you need is a basic grasp of price highs and lows, and the ability to zoom in and out of relevant charts to determine whether the current market is moving close to or around the critical price points.
Strengths and Weaknesses
The key strength of support and resistance trading is that when you stumble across an actual support or resistance trade, it can be worth a lot of money to you. Catching the correction at its highest or lowest point means you are virtually guaranteed a profit of some sort, and assuming your research has turned out for the best, can allow you to trade over the full arc of the price correction.
Simultaneously, the extent of market movement that is its greatest strength is also this strategy’s biggest downfall. There are no rules suggesting that markets can’t move outside the parallel links of high and low, and as a result you may find yourself getting involved in a position that looks like a correction but in actual fact turns out to be a blip en route to setting a new price high or low. In this respect, it’s advisable to wait until you actually see the reversal taking place around the support or resistance level before staking your capital.