Support and resistance is one of the most commonly used concepts in the Forex trading. However, most traders have their own way of measuring support and resistance. Many a times, it can lead to false estimations, which can in turn affect business. So it is important to understand how to read charts and indications to understand when a support is an actual support and not a market tested one and the same applies for resistance.
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What is support and resistance?
To understand the concept of support and resistance think of a zigzag line heading upwards. Every time the line heads up, it signifies a bull market, and after every surge it is bound to be drawn back, hence the zigzag pattern. The top crest of the zigzag pattern shows the resistance, when forex reaches this point it faces resistance and goes back down. The downward troughs signify support, when forex reaches the point; the market pushes its way upwards. That’s how the forex market keeps oscillating between the two points, forming support and resistance continuously.
How to identify support and resistance?
Many a time, even if the candlesticks move past the X-axis, they may jump back above it quickly or at least eventually. The again does not indicate an actual breaking of support. If you were to base your idea on the fact that the candlesticks past X-axis refer to a real breakout and you were to sell your forex, then you could have hit some serious loss.
How to avoid false breakouts?
Sometimes when the line passes through resistance, it can actually potentially become a support. The more the frequency with which price tests the levels of support and resistance without breaking it, the stronger the area becomes.