Every financial market, including the forex market, in the world, has the tendency to rise and fall. The best way to figure out the market movements is to analyze their price action along with the different levels of price movements. Two main levels in the forex market are support and resistance levels.
Support and resistance levels are main elements in technical analysis and they can help you in developing a supporting structure from which you can get a better understanding about the price movements, stop loss positioning and profitable opportunities in the market. Basically, you will get to learn how the forex market works and what are the factors that affect the price movements and how they do it.
Support & Resistance levels / zones
The strategies based on support and resistance zones or levels can help you in identifying the most profitable points where you can buy or sell the currencies to make most out of the market trends.
- Support Level / Zone - Support zone is that level in the price movements where the price cannot fall below that level. Basically, after reaching the support level, the price starts moving back up. Price simply cannot go below the support level. Several traders make their trading moves at the support level.
- Resistance Level / Zone - Resistance zone is that level in the price movements where price will not rise above that level. It is a resistance level that price finds very difficult to pass through to move higher than it. After reaching the resistance level, the price goes back down.
If you are finding it difficult to trace the support or resistance level, given below are a few steps to do it:
- Study the price chart.
- Then look for continuous price points where price does not go below them. That can be your support level.
- Now look for the continuous price points where price does not move above them. That can be your resistance level.
- The more difficulty prices have to move beyond support and resistance points, stronger the levels will be.
- As a result, when sometime in future when a price touches these levels, expect them to move in reverse.
When it comes to identifying the market conditions, market trends are perhaps one of the most sought out factors that traders look for when buying or selling a foreign currency. The future market trends and price movements are somewhat unpredictable. However, by simply identifying a trend, a trader can recognize what could be a better move to make profits from current circumstances.
A trend is an occurrence when a market is moving in the same direction for a long period of time. Trends usually occur due to two main psychological biases on people’s part. They are herding and confirmation bias.
Herding Bias - When a market has been moving downwards for a longer duration, traders expect the market to continue in that direction in coming future as well. Due to this, they might start selling their currencies at a lower price, which will again lead to the market moving down further; hence, more people selling their currencies. This is called Herding.
Confirmation Bias - in this, traders make assumptions regarding in which direction the market is moving and then they regard all the present evidence in the forex market to see and confirm which direction the market may go.
Counter Trend Trading
In counter-trend trading, trader assumes that current trend will move back in reverse and then tries to make profits from that reverse trend. In general-counter trend, trading is a medium-term plan of action where same trading positions are kept during many day or even weeks. For forex trading in Sri Lanka, you can use counter-trend trading strategies for various goals along with earning clean profits, diversifying and managing the risks involved, and so on. You can also look for skilled forex brokers in Sri Lanka to do the job for you.
Range Bound Market Trading
A range-bound market can be defined as the market where price moves between a particularly high and low price. The higher price is leading resistance level where price can’t break through the level to rise further under existing circumstances. Similarly, the lower price is the leading support level where price can’t break through to fall below the level under existing circumstances. This market movement can be categorized as horizontal movement.
Now, in order to make sure that the range-bound market trading goes on smoothly and effectively, it is necessary to find and confirm the range. For that price must touch two similar high and low prices and that too without breaking those levels at any point between them. After you have confirmed your range, the best approach for trading is to purchase the currencies near the support level and sell the currencies near the resistance level.
A breakout takes place when the price moves past a specified trading range for example support and resistance level with enlarged volume.
In breakout trading, the main objective of the trader is to get into the forex market at the time when the price does a breakout and then continue to the trade in that direction up until the volatility stops.
There are 3 types of breakouts. They are:
- Continuation breakouts
- Reversal breakouts
- False Breakouts
At times, when there is an extended price movement of the market in one direction, the traders take a respite and think about how to proceed further. If they decide to trade in the same direction as previously, it is called continuation breakout.
In reversal breakouts, market price moves in the same direction for a period of time and after a respite, if traders think that the previous trend was not right, they will move the price in reverse or opposite direction.
In false breakouts, the price moves past a certain level or trading range like support or resistance, or triangle, but then it doesn’t speed up in the same direction. It might move back into the trading range.
If you want to have some tips on how to trade forex in Sri Lanka successfully, you can refer to our article, Forex Money Management – Forex trading tips that you need to know to be a successful trader.