Using Support and Resistance to Improve Your Forex Trades

March 19, 2025

Support and resistance are fundamental concepts in forex trading that help traders make informed decisions about entry and exit points. Understanding these price levels can improve your ability to predict market movements and manage risk effectively.

What is Support and Resistance in Forex Trading?

Support is a price level where a currency pair tends to stop falling and may start to rise. It acts as a “floor” where buying pressure overcomes selling pressure, causing the price to stabilize or bounce back up.

Key characteristics of support:

Occurs at historical price levels where demand increases.
Prevents further price declines and signals potential buying opportunities.
Becomes a resistance level if the price breaks below and retests it from the opposite direction.

For example, if the EUR/USD repeatedly finds buyers around 1.1000 and rebounds, that level is considered strong support.

Resistance is the opposite of support. It is a price level where a currency pair tends to stop rising and may start to decline. This happens when selling pressure overcomes buying pressure, creating a “ceiling.”

Key characteristics of resistance:

Occurs at historical price levels where supply exceeds demand.
Prevents further price increases and signals potential selling opportunities.
Becomes a support level if the price breaks above and retests it from the opposite direction.

For example, if the GBP/USD struggles to rise above 1.2500, with sellers consistently pushing the price lower, that level is strong resistance.

How to Identify Support and Resistance Levels in Forex

There are several methods to identify support and resistance levels in the forex market. Here are the most reliable techniques:

Using Historical Price Data

Analyzing past price movements is the most straightforward way to find support and resistance. If a currency pair has bounced off a price level multiple times, that level is likely significant.

Identify past price points where reversals happened.
Mark key levels where price frequently stops or changes direction.
Look for confluence, where multiple historical levels align.

Trendlines and Chart Patterns

Trendlines help visualize support and resistance in trending markets:

Uptrend: Support is found along the rising trendline.
Downtrend: Resistance is found along the falling trendline.

Chart patterns such as double tops, double bottoms, and head and shoulders also reveal strong support and resistance levels.

Moving Averages as Support and Resistance

Moving averages, especially the 50-day and 200-day moving averages, act as dynamic support and resistance levels. When price approaches these moving averages, traders look for price reactions:

Above the moving average: Acts as support.
Below the moving average: Acts as resistance.

Psychological Price Levels

Round numbers like 1.0000, 1.1000, and 1.5000 often act as psychological support and resistance because traders place orders around these key price points.

For example, traders may set stop-loss or take-profit orders around 1.2000 in the EUR/USD pair, causing price reactions.

Fibonacci Retracement Levels

Fibonacci retracement levels help traders find potential support and resistance by measuring price corrections in a trend. Common retracement levels include:

38.2% (Minor retracement, weak support/resistance)
50.0% (Moderate retracement, significant level)
61.8% (Strong retracement, high probability of reversal)

How to Trade Using Support and Resistance in Forex Trading

Support and resistance are powerful tools in forex trading that help traders predict price movements and make better trading decisions. These levels represent key areas where the price tends to react, either reversing direction or breaking through to new levels. Understanding how to trade using support and resistance can increase your chances of entering high-probability trades with a good risk-to-reward ratio.

1. Buying at Support

One of the most common and effective ways to use support levels in forex trading is to buy when the price approaches a strong support level. Support levels represent areas where buyers tend to enter the market, preventing further price declines.

How to do it:

Identify a strong support level – Look for a price level where the market has bounced multiple times in the past. The more times the price has tested this level and held, the stronger the support.
Wait for confirmation – Do not place a buy order just because the price is near support. Instead, look for a confirmation signal, such as:
- A bullish candlestick pattern, such as a hammer, bullish engulfing pattern, or morning star, shows buyers stepping in.
- A rejection wick is a long lower wick that signals strong buying pressure.
- Increased trading volume, which indicates that buyers are aggressively entering the market.
Enter the trade – Once confirmation appears, place a buy order slightly above the support level to ensure the price is truly bouncing.
Set a stop-loss – Place the stop-loss slightly below the support level to protect against a potential breakdown.
Set a take-profit target – Aim for the next resistance level or a risk-to-reward ratio of at least 1:2.

Example:

Suppose EUR/USD has a strong support level at 1.1000.
If the price approaches this level and forms a hammer candlestick with a long lower wick, it indicates that buyers are stepping in.
A trader could place a buy order at 1.1010 to catch the upward movement.
A stop-loss could be placed at 1.0980 below support to protect against a breakdown.
The take-profit target could be 1.1100, which is the next resistance level.

By waiting for confirmation and setting proper stop-loss and take-profit levels, traders can reduce risks and improve their success rate.

2. Selling at Resistance

Just as traders buy at support, they can also sell when the price reaches a strong resistance level. Resistance levels act as ceilings where selling pressure increases, preventing the price from rising further.

How to do it:

Find a strong resistance level – Look for a price level where the market has repeatedly reversed in the past. The more times the price fails to break through, the stronger the resistance becomes.
Wait for confirmation – Before entering a sell trade, check for bearish signals such as:
- A bearish candlestick pattern, like a shooting star, bearish engulfing pattern, or evening star, indicates that sellers are taking control.
- A rejection wick (long upper wick), signaling strong selling pressure.
- An RSI (Relative Strength Index) above 70 indicates that the market is overbought and is due for a correction.
Enter the trade – Place a sell order slightly below the resistance level once confirmation appears.
Set a stop-loss – Place the stop-loss just above the resistance level if the price breaks out.
Set a take-profit target – The take-profit can be placed at the next support level or at a pre-determined risk-to-reward ratio.

Example:

Suppose GBP/USD faces strong resistance at 1.2500.
If a shooting star candlestick forms at this level, it suggests that buyers are losing momentum.
A trader could enter a sell order at 1.2490, just below resistance.
A stop-loss could be set at 1.2525, slightly above resistance.
The take-profit could be 1.2400, which is the next support level.

Selling at resistance allows traders to take advantage of price reversals and maximize profits while minimizing risks.

3. Trading Breakouts

Sometimes, the price does not respect support or resistance levels and instead breaks through them. This can lead to strong price movements toward the breakout. Breakout trading involves entering trades when the price successfully moves beyond a support or resistance level.

How to do it:

Identify a key level – Find a well-established support or resistance level where the price has struggled.
Wait for a breakout confirmation – A valid breakout is confirmed when:
- A full candlestick closes beyond the support or resistance level.
- Increased trading volume accompanies the breakout, showing strong momentum.
- Indicators like MACD or RSI confirm the move.
Enter the trade – Place a buy order above the breakout of resistance or a sell order below the support breakout.
Set a stop-loss – If buying, place the stop-loss below the broken resistance (now support). If selling, place it above the broken support (now resistance).
Set a take-profit target – Identify the next major price level where the market will likely react.

Example:

Suppose USD/JPY has a strong resistance at 145.00.
If the price breaks above 145.00 and closes at 145.20 with high volume, it signals a valid breakout.
A trader could place a buy order at 145.25 to ride the breakout.
A stop-loss could be placed at 144.80, below the broken resistance.
The take-profit target could be 146.50, the next major resistance.

Breakouts often lead to significant price movements, but false breakouts can occur, so it is essential to wait for confirmation.

4. Trading Retests (Support Turns into Resistance and Vice Versa)

When a support level is broken, it often becomes a new resistance, and when a resistance level is broken, it becomes a new support. This concept, called role reversal, provides traders an additional trading opportunity.

How to do it:

Wait for a retest. After a breakout, the price may return to the broken level before continuing its movement.
Confirm rejection – If the price fails to break back into the previous range, it confirms the new support or resistance.
Enter the trade – Sell at old support (now resistance) or buy at old resistance (now support).
Set a stop-loss – Place the stop-loss slightly beyond the new resistance/support level.
Set a take-profit target – Aim for the next major price level.

Example:

Suppose AUD/USD breaks below 0.6800 support.
The price then rises back to 0.6800, but a bearish engulfing candle forms.
A trader could enter a sell trade at 0.6790.
A stop-loss could be placed at 0.6825, above the new resistance.
The take-profit target could be 0.6700, the next support.

Retests allow traders to confidently enter a trade, as the new support or resistance level is confirmed.

Final Thoughts

Support and resistance trading is a fundamental skill in forex. Traders can make better decisions by using entry confirmations, proper stop-loss placement, and risk management.