Let’s begin with what a support is. When the price of an asset moves below a certain level, it is said to be at support. This means that the price has found a level where it can find buyers again and not continue falling in this case. The opposite of this is when the price goes above a certain level, it is said to be at resistance. This means that the price has found a level where it cannot find sellers anymore and therefore continues to rise.
Now let’s take an example:
If we take the EUR/USD pair, we have seen that in mid-2015, we had an uptrend with strong resistance levels every time we tried to break higher. This was caused by many factors such as economic growth in Europe which led to more demand for USD (as their economy grew faster than ours). Also there was some speculation about an ECB rate cut which created selling pressure on EUR/USD as investors believed rates would go down further into negative territory.
What is support and resistance?
Support and resistance are price levels where the price of a currency pair tends to top out (resistance) or bottom out (support). These levels are significant because they’re often seen as key turning points that indicate when it’s time to enter or exit a trade.
How do you identify support and resistance?
There are several ways to identify support and resistance levels. When the price reaches one of the bands, it can be an indication that the market is reaching an extreme level of volatility which may result in a reversal move down from resistance or up from support. Another way is by looking at past price action as identified by candlesticks on a chart – these candles will show where buyers or sellers have stepped in during previous trades, thereby giving us our next potential levels for future trades.
Here’s how it works:
When a currency pair moves below a support level, it shows that there is more supply than demand. This means that sellers are in control of the market and that traders are likely to sell into any rallies (or buy into declines) until they reach another support level.
Similarly, if a currency pair moves above a resistance level then it shows that there is more demand than supply. This means that buyers are in control of the market and will buy into any dips (or sell into rallies) until they reach another resistance level.
There are three types of support and resistance levels:
– Fibonacci support (or) resistance levels are calculated using ratios based on Fibonacci numbers (0.382, 0.50, 0.618) and act like magnets for the price action by attracting buyers (resistance) or sellers (support). These levels tend to hold over time and represent major changes in trend direction;
– Price congestion areas are areas where there has been a lot of activity around a specific price point (a congestion phase); these areas tend to act as strong support or resistance zones;
– Round number support/resistance zones occur when the market reacts strongly to round numbers (100, 200) because those numbers are easy for traders to remember when making.
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