One of the key tasks that the technical trader needs to do in order to trade in the Forex market is to identify the key support and resistance levels like this. This is the area where the currency needs to be bought and sold respectively. It is something that needs to be mastered because technical analysis support and resistance levels have to be spotted visually.
The support and resistance levels are the historical levels from where the prices have moved up or down in the past. These need to be spotted and the idea behind the support and resistance levels is that it is believed that if the price has reversed from this level in the past then it is likely to do the same in the future as well.
Support and resistance levels
It is important that you first understand what creates these levels. The resistance level forms after the market have risen and the buyers get exhausted. The Forex traders step in to start selling the currency. This causes the prices to fall and the area from where this reversal in trend happens is the resistance level.
Similarly, the support is the level till where the prices were falling too but suddenly the sellers got exhausted and the buyers took control causing a reversal in the market. This is the level where the price began to rise.
The support and resistance levels are nothing but areas of demand and supply. The prices hit the low and then they start to rise because there is an increase in demand which is the support level. The prices hit the high and this causes an area of supply which is nothing but the resistance level.
The technical traders believe that the way traders have reacted in the past when the price reached a particular level there is a high probability that they would react in the same way in the future when the price reached that level again. They thus look to spot the levels and this gives them a high probability area to be a buyer or a seller in the market.
Do all the support and resistance levels work
The truth is that not all the support and resistance levels work. This is because one needs to spot the quality levels that have seen a huge price rise in the past. There will be a number of levels when you start to look at your chart but it is only those that have seen a big spike in price that will work. So look at the levels that have seen a reversal with huge candles or with a gap up.