One of the most common questions about forex trading is whether some of the basic stock trading rules apply, especially support and resistance. Those getting involved with foreign exchange for the very first time are often surprised to learn that the same support and resistance guidelines hold true when trading international currency pairs. If you’re coming into forex without a background in the traditional stock market, then below are a few tips that will give you what you need to begin.
What are Support and Resistance?
Levels of price support and price resistance are part of general economics, and of course they play a part in stock and forex trading too. The most fundamental concept is for anything that’s bought and sold, there’s a price level (a high) at which purchasing is likely avoided. Likewise, there’s a low point where the item is considered such a bargain that the available quantity sells out almost immediately.
Think of a situation at which gasoline is priced at triple what it is today. Especially in today’s remote climate where more time is spent at home instead of on the road, gas sales would plummet. Or, what if your favorite service station held a sale and offered fuel for half off per gallon? Of course, it would sell out in minutes. Theoretically, there’s some point in which many shy away from purchases, and a lower point at which the seller can’t keep volume in stock.
Stock Share and Currency Prices Rise and Fall
You can simply look at a standard stock or international currency chart and visually understand that higher price and lower one. It takes a bit of experience but typically you use moving averages to see where prices attempted to make a breakthrough but then fell back several times in a row. That point is resisting a rise in value. Similarly, you can see the lower area on the chart where the values fall and seem to bounce back up a few times in a row. That’s an example of a given value on the chart acting as a supportive threshold for that particular item’s value. Once you identify the support and resistance levels, you’re armed with powerful data and can make exceptionally accurate trades.
Say you want to buy XYZ stock, which has an R point and a S point. One way to use the information is to wait until the shares bounce off the S line before buying in. From there, you would wait until prices rise to the R point area and indicate that prices are trending back downward before deciding to sell. It’s a classic way of buying low and selling high that works in many, but not all, situations.
It’s Not an Isolated Concept
Keep in mind that the S&R values move around as time passes. Thus, there’s no one point of S or R on a given chart. However, you can use moving averages to see how that dynamic SR zone is trending up or down and make your purchases and sales accordingly.