How To Use Support And Resistance Levels With Online Currency Trading
One of the most popular tools that all foreign exchange traders should be familiar with is identifying support and resistance levels on the price chart of any currency pair that you might be trading. Support and resistance levels are a popular technical analysis tool that can be applied to nearly every single financial market including the stock market, and it is particularly useful when it comes to forex trading because it can give you a number of advantages such as knowing exactly where to set your stop loss levels in order to minimize risk.
The idea behind support and resistance levels is that as the price action unfolds on the price chart there will be certain levels where the price will either have trouble exceeding in a bullish uptrend or will have trouble sinking below in a bearish downtrend. This means that the price will frequently come close to one of these price levels and then retrace its former price movements, and the more often that a price comes close to this level without breaking through significantly then the more valid this line is as a support or resistance level.
The reason this type of chart analysis can be applied to nearly every market is that price action and price volume is generated by people and real human traders, and there will be certain levels that represent a psychological barrier to the traders that make up the market, which will usually correspond to a round number in the price level. If the current market price ever breaks through an established support or resistance level, that level will then reverse roles and become the opposite, meaning that support levels turn into resistance levels and resistance levels turn into support levels.
Being able to look at a given price chart for a particular currency pair and identify where these levels are can be extremely valuable because it grants you the ability to set your stop loss orders and take profit orders at the right levels where the price would have to cross an established level in order to trigger your orders. This means that if you have a buy order for a particular currency pair and you set the stop loss order just below a support level and the take profit order just below a resistance level. By understanding these established forex charting principles you should be able to maximize your trading performance by reading the market and understanding the price behavior at certain levels.
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