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The Importance of Understanding Support and Resistance in Forex Trading

Understanding the concept of support and resistance is a crucial first step for beginner traders before embarking on their journey into technical analysis. This concept is one of the key aspects in forex trading analysis as it provides a strong guideline for traders in making decisions. In this article, we will delve deeply into what support and resistance are, how they are formed, and how to use them in trading platforms.

What are Support and Resistance?

Support and resistance are key points on price charts that indicate where buying and selling pressures meet. Support is the level where prices tend to stop falling and begin to rise again, while resistance is the level where prices tend to stop rising and begin to fall again. In the trading world, support and resistance are often regarded as the "floor" and "ceiling" in price movements.

Why are Support and Resistance Points Formed?

Support and resistance points are formed due to profit-taking actions by traders. When prices reach certain levels considered too high, traders who have bought the asset tend to take profits by selling it again. This leads to increased selling pressure and prices falling back, forming resistance points. Conversely, when prices reach levels considered too low, traders who have sold the asset tend to take profits by buying it back. This leads to increased buying pressure and prices rising back, forming support points.

Examples of Support and Resistance Points

For example, we can observe the XAU/USD chart on the Daily Time Frame. Resistance points are seen at the level of 1358.88, where prices struggle to rise above it and tend to turn downwards. On the other hand, support points are seen at the level of 1310.31, where prices struggle to fall below it and tend to turn upwards.

Using Support and Resistance in Trading Platforms

In trading platforms, using support and resistance requires careful observation to identify relevant levels. Traders often use various methods, including creating trendlines, identifying double zeros (psychological levels), and applying Fibonacci Retracement.

  1. Creating Trendlines: Trendlines are used to identify the current trend. High points in a downtrend and low points in an uptrend are often used as support and resistance points.
  2. Identifying Double Zeros (Psychological Levels): Double zeros are price levels that have round numbers at the end. Prices often reverse when they reach these levels due to market psychology viewing them as saturation points.
  3. Applying Fibonacci Retracement: Fibonacci Retracement is used to identify important levels in price movements. These retracement levels are often used as support and resistance points.

By understanding the concept of support and resistance and how to use them in trading platforms, traders can make better decisions and increase success in forex trading.

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