Support and resistance levels are specific price points in which retail and even institutional traders draw horizontal lines based on how prices on a Japanese candlestick chart have interacted with that particular price. Support and resistance levels can be identified as both zones or levels in which price had previously been respected.
Both experienced and novice traders tend to like to use support and resistance levels for forming trading ideas around because they are the easiest to mark out on a chart. One could argue they’re much less subjective than traditional trend lines because there isn’t much left up for interpretation when marking out highs and lows with a horizontal line like there is with trend lines.
As a trader that utilises technical analysis, support and resistance will likely be the first thing you learn as a trader who is new to the markets. In this article, we’re going to cover what support and resistance levels are in detail, plus we’ll also cover the pros and cons of using them, and how they are much like supply and demand zones that we use within the Phantom Trading forex trading strategy.
Remember, resistance is akin to a supply zone, and support is akin to a demand zone, it’s really that simple.
What Are Support Levels In Forex
Support levels in the forex market are price levels that are marked out on the chart to represent lows in price that have been previously respected or have “held” above a certain price, hence the name “support levels”. Identifying a support level is as simple as looking for a series of lows on a chart that are around the same price level, then drawing a horizontal line on your chart to define your level of support.
Forex Resistance Levels In Forex
Resistance levels in the forex market are price levels that are marked on a chart to represent highs in price that have been previously respected or have “held” below a certain price point, hence the name “resistance levels”. Identifying levels of resistance is as simple as looking for a series of highs on a candlestick chart that are around the same price level, then drawing a horizontal line on your chart to define your level of resistance.
Pros and Cons of Using Support and Resistance Levels
Using support and resistance as a tool within your technical analysis arsenal comes with its strengths and weaknesses like any other tool. Nothing will work 100% of the time, and you can’t really expect that.
The nice thing is that support and resistance levels are probably the most widely used tools among retail and institutional traders. This, of course, is a double edged sword because while it can work well, these levels that you identify on the chart can be subjective in some cases, especially if you’re defining support and resistance using trend lines, plus they are prime levels that are often used for manipulation.
Our suggestion is to use a hybrid approach like the one we teach at Phantom Trading where we take several factors into consideration when analysing the chart. Oftentimes we like to use supply and demand zones which are nearly the same as support and resistance levels/zones, but we consider where there are accumulations of liquidity on the chart to help us navigate potential levels that will be manipulated, or targeted as liquidity in the forex market.
Forex Support and Resistance Levels
Sometimes traders will use support to resistance or resistance to support levels where price breaks above a resistance level, or below a support level, then starts respecting that same price level after the break out. This by its very nature is what many break and retest trading strategies use to identify potential trade setups, and can be an effective way to judge the overall direction of price on the timeframe you’re analysing from.
When doing your technical analysis, be sure to keep an eye out for levels of support or resistance that hold, break, then get retested. The closest thing to this within Phantom Trading are supply and demand flip zones, which can be great for riding the momentum of a particular move in the market in certain trading conditions.
Forex Support and Resistance Breakouts
As mentioned previously, if we see support or resistance fail, and price shoots in the opposite direction, oftentimes we can treat that break as either a manipulation of that level, or as a potential breakout! Trading support and resistance breakouts are a fantastic way to quickly flip your bias when your original trade idea fails.
Remember, support and resistance levels (supply and demand zones) can just as easily be used as liquidity to target too so it’s important to have a clear understanding of the market’s direction based on market structure and orderflow.
If you’re new to trading or you think you could brush up on your market structure skills, be sure to check out our basic and advanced market structure PDF guides which you can get for FREE by signing up for our newsletter below.
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Robert Castillo – Currency & Commodities Trader,
Financial Analyst, Writer & Editor.
Robert is a funded trader based out of Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading he enjoys producing music, mixed martial arts, and riding his motorcycle in the summer.