Support is an important parameter in trading, therefore there are different strategic analytical tools with already built in support as well as resistance analysis. Support coupled with Resistance suggests to the investors different hints about how to trade. Let us study what support is and which are the advantages of it. Support is one of the technical analyses widely used in Forex Market.
From the chart below we see that support is the currency price level lower which the price of the currency pair cannot go. Theoretically support in trading is defined as the currency price level at which demand is rather tough therefore keeps the price from further weakening. The advantage of this trading strategy is that as the price glides gradually to the line of support and therefore becomes cheaper, the buyers find more interest in the deal and are keener to buying. On the contrary sellers get worse deal, and are not inclined to selling. In this kind of situation demand rises over supply which keeps the price from dropping below support. However, support is not always resistant and finally the price may break below it. If this happens, it means the sellers won over the buyers. Anyway, in the next step, the trader can expect another layer of support to establish in the point where buyers are.
- The formation of the support line is directly connected with the established direction in currency price movement. It can take the form of horizontal lines or sloped lines.
- Support has a wide usage in price pattern analysis as well as in the analysis of technical indicators.
- In case of upward trend we deal with support with a positive slope formed connecting the lows.
- Horizontal support is formed mainly by lower trendline in a sideways trend.
- The function of support is to indicate particularly at what level the price is considered advantageous to take long positions. Some buyers prefer acting when the price is almost equal to support level.
- In the scenario when the support fraction occurs and the line breaks, still many investors may suppose the price will continue falling, thus, in this case, the previous support will take the role of resistance to hold the rally.