Forex glossary of terms
Forex support and resistance lines
Forex trading has been studied precisely since its origin and as a result, many concepts have evolved to understand its nature. The model of currency trading is an unstable concept and is prone to regular fluctuations. One significant tool to gain familiarity with forex trading is that of technical analysis. This tool strictly follows the utilization of charts, graphs and similar representations to evaluate different types of investment entities. Support line and resistance line are two important ingredients of what is popular with the name of forex trading channel.
What is Concept of Trading Channel?
A trading channel is the simple pictorial representation of high price and low price values of various world currencies over a definite period of time. The prices associated with different currencies may experience ups and lows and these are depicted accurately by drawing trading channel. The two boundaries of a trading channel are known as Support line and Resistance line.
Clear View of Forex Trading Lines
Here is the simplest representation of support line and resistance line, as borrowed from Forex Channel:
One of the technical analysis principle of stipulates that support can turn into resistance and vice versa. Once the price breaks below a support level, the broken support level can turn into resistance. The break of support signals that the forces of supply have overcome the forces of demand. Therefore, if the price returns to this level, there is likely to be an increase in supply, and hence resistance.
The other turn of the coin is resistance turning into support. As the price advances above resistance, it signals changes in supply and demand. The breakout above resistance proves that the forces of demand have overwhelmed the forces of supply. If the price returns to this level, there is likely to be an increase in demand and support will be found.
From the following example, we can see that support can turn into resistance and then back into support.
Talking about resistance line, it is drawn in the situation, when the price of a particular pair of currencies reaches its peak value. In this situation, the investors in the forex market are more than interested in selling, rather than buying, to earn maximum profit. In fact, the regular buyers are enforced to sell during this particular circumstance.
On the other hand, the support line is drawn, when the price of a particular pair of world currencies is declined to the lowest possible level. Thus, there is more number of buyers in the market at this particular stage. And, the number of sellers automatically decreases.
These two concepts help to decide a particular investment trend, which must be followed to extract major benefits from this investment market.
Some Important Facts to Consider
There are some important facts surrounding support and resistance lines, which must be taken into account before utilizing them.
1) First and foremost, the forex market trends can never move in a straight line and they always follow a zigzag path.
2) In order to analyze a particular market trend, the support and resistance levels must be taken into considerations.
3) A trend line is drawn by joining two resistance levels or two support levels.
4) Most importantly, a particular market trend is said to be stable, if the trend line corresponding to it touches maximum number of resistance levels or support levels.
Advantages of Forex Trading Lines
The support and resistance forex lines are helpful in carrying out technical analysis with ease, so that a particular investment grows to produce good yield. These tools help an investor to evaluate the prevailing market trends and follow the path escorted by different trend lines. In short, the forex market monitoring is done by keeping the track of support and resistance lines.
How to Gain Knowledge
The support and resistance lines and levels tend to reverse their roles during different circumstances and this makes forex market analysis a cumbersome process. It is a strange fact that different market analysts have different perspective for support and resistance lines. Thus, it might become difficult for a novice forex market investor to understand these terms and act accordingly. However, in order to solve this problem, there are many competent resources available in the form of forex trading books and online help guides.
At the same time, one can't have practical knowledge of these concepts, without actually entering the market. Thus, you are expected to escort yourself to the right path and have a clear understanding of these significant terms related to forex market analysis.
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