Forex, also known as foreign exchange, is the market where currencies are traded. It is the largest and most liquid market in the world with an average daily trading volume of over $5 trillion. In Forex trading, support is a term used to describe a price level at which buyers are expected to enter the market and prevent the price from falling further. In this article, we will explain what support is and how it works in Forex trading.
What is Support?
Support is a price level at which the demand for an asset exceeds the supply, causing the price to stop falling and potentially reverse direction. It is a concept that is used in technical analysis to identify potential buying opportunities. The support level is determined by connecting the price points on a chart where the price has previously bounced back from a downward trend.
The support level can be identified in two ways: horizontal and diagonal. A horizontal support level is a price level at which the price has previously bounced back from a downward trend. A diagonal support level is a trendline that connects the higher lows of the price.
How Does Support Work in Forex Trading?
In Forex trading, support is an important concept because it helps traders identify potential buying opportunities. When the price of a currency pair reaches a support level, it is expected that buyers will enter the market and prevent the price from falling further. This can create a buying opportunity for traders who are looking to enter the market.
When the price reaches a support level, traders can use technical indicators to confirm whether the support level is strong enough to hold the price. For example, traders can use the Relative Strength Index (RSI) to identify whether an asset is oversold or overbought. If the RSI is oversold, it can indicate that the price has reached a support level, and buyers may enter the market to push the price up.
If the support level is broken, it can indicate that the price is likely to continue its downward trend. This is known as a support breakout, and it can create a selling opportunity for traders who are looking to short the market.
Traders can use support and resistance levels to set their stop-loss and take-profit levels. A stop-loss is a predetermined level at which a trader will exit a trade if the price moves against them. A take-profit level is a predetermined level at which a trader will exit a trade if the price moves in their favor.
Conclusion
In conclusion, support is an important concept in Forex trading that helps traders identify potential buying opportunities. When the price of a currency pair reaches a support level, it is expected that buyers will enter the market and prevent the price from falling further. Traders can use technical indicators to confirm whether the support level is strong enough to hold the price. If the support level is broken, it can indicate that the price is likely to continue its downward trend. Traders can use support and resistance levels to set their stop-loss and take-profit levels.
