The words “support” and “resistance” are among the most common terms you’ll encounter when trading.
The concepts of support and resistance form the backbone of many other trading concepts and strategies.
This lesson will help you better understand what this concept is all about and why the terms “support” and “resistance” constantly pop up in many of your lessons.
As you’ve seen in the image above, the support level is the lowest point a price drops to before moving up again. It indicates the level at which buyers become willing to buy a particular asset. This causes a gradual halt and eventual reversal of the asset’s price movement.
An asset’s support level shows the point where the sentiment to buy an asset overcomes the selling sentiment. At this point, the asset’s price will slowly start an upward trend.
Keeping an eye on an asset’s support level is crucial as it is often a good indicator of when price movements will change direction.
It is often a good idea to enter a long position when assets are approaching the support level.
In contrast with support, the resistance level refers to the highest point that an asset’s price reaches before starting to decline. It signals a change in market sentiment from a willingness to buy to a desire to sell.
When assets near the resistance level, the upward movement of prices will gradually come to a stop before completely reversing.
Similar to the support level, an asset’s resistance level is a reliable marker of when to expect price changes to occur.
It’s common practice to enter short positions when you notice an asset’s price approaching the resistance level.
Trend lines and trend channels are trading concepts closely associated with support and resistance. These concepts are related because they’re based on the latter.
Despite their relationship, these concepts are on opposite ends of the forex popularity spectrum. Support and resistance are the bread and butter of many trading strategies, while trend lines and channels are often rarely used.
However, it doesn’t mean that these concepts are any less important.
Trend lines are probably the simplest technical indicator you’ll come across. A trend line, as the name suggests, is a literal line placed on either the support or resistance levels of trends.
There are three types of trendlines: an uptrend line, a downtrend line, and a horizontal or sideways trend line.
Uptrend lines are drawn at the support level of an upward trend. Conversely, downtrend lines are placed at the resistance levels of downward trends.
Horizontal trend lines are created when price movements are relatively flat, such as during market consolidation periods. In this case, the line can be placed either at the support or resistance level, depending on the market situation.
When drawing trend lines, you must pay attention to the number of peaks and valleys. While two tops or bottoms make a valid trend line, three are required to confirm it.
Trend channels are very similar to trend lines. In fact, these two are so similar that you may even view a trend channel as two trend lines sandwiching a trend.
Like trend lines, there are three types of trend channels: ascending, descending, and horizontal.
You can create an ascending trend channel by tracing an uptrend line and placing another line at the same angle on the opposite side (touching the resistance level).
Descending trend channels are created by doing the opposite. Draw a downtrend line and place a parallel line at the same angle (touching the support level).
Lastly, you can create horizontal trend channels by drawing horizontal trendlines on a trend's support and resistance levels.
Typically, a trend channel’s bottom is the buy zone, while the top is the sell zone.
When drawing trend channels, keep in mind that both trend lines must always be parallel. However, they don’t have to be picture perfect parallel, but just enough to let you draw a line without forcing it.