Forex support and resistance are very significant price levels for traders. They are able to provide reliable signals and offer, in general, information on market trends. Specifically, here are their respective definitions.
Defining Support and Resistance
Support is the price level at which, at the height of a bearish phase, the asset has "bounced" several times to finally reverse its trend.
Resistance is the price level at which, at the height of a bullish phase, the asset has bounced, reversing its trend.
From these simple definitions, a consideration emerges. Both support and resistance are able to offer two different types of signals.
Bounce Signals vs. Breakout Signals
Bounce signals. If the price touches the support or resistance and then retraces its steps, it is likely that the market has entered a breakout situation: the trend reversal is near.
Breakout signals. If the price touches the support or resistance but continues on its way, the trend is confirmed and, indeed, should be considered strengthened.
Using Support and Resistance in Practice
How can support and resistance be used? There are numerous ways. Consider a resistance that provides a bounce signal, set in a context where the asset has touched the level and has turned back. The trader draws a fundamental indication from it: sell. The bounce, in fact, certifies that the trend has ended and, indeed, the probabilities that a negative trend will establish itself are high.
Are support and resistance reliable? Certainly yes, but alone they can do little. Or rather, they can give rise to false signals. The wider the timeframe used to identify them, the more reliable they are. The reason for this lies in the fact that support and resistance are the result of a calculation on highs and lows, and these latter elements are susceptible to the time horizon used. For an approach that adjusts these levels as price moves, see dynamic support and resistance levels.
The advice, therefore, is to always and in any case use support and resistance, but in conjunction with other technical analysis tools such as indicators capable of providing an overview of volumes, recognizing overbought and oversold situations, etc. It is not uncommon, in fact, for a price to exceed the level but instead of continuing, certainly a little late, to retrace its steps.
