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CHAPTER 4 - LESSON 3
Support and resistance levels are price levels where price has historically had difficulty breaking through.
Traders use these support and resistance markers to identify possible entry and exit points for trading, as well as to set their stop loss and take profit levels.
Here are some key things to know about support and resistance levels:
Price levels at which the market has historically had difficulty falling below.
• Traders use these levels to identify potential entry points for long (or buy) trades, as they indicate that the market is likely to bounce back up from that level.
Price levels at which the market has historically had difficulty rising above.
• Traders use these levels to identify potential entry points for short (or sell) trades, as they indicate that the market is likely to move back down from that level.
When a support level is broken and the price falls below it, that level may now act as a resistance level, preventing the price from rising back above it.
Conversely, when a resistance level is breached and the price rises above it, that level may now serve as a support level, preventing the price from falling back below it.
When the price of a currency pair appears to break through a well-established support or resistance level, only to reverse its direction shortly after.
Traders should be cautious when trading around support and resistance levels and should wait for confirmation of a breakout before entering a trade.
In summary, support and resistance levels are key tools for identifying potential entry and exit points. Be mindful, support and resistance levels are not exact price levels. Instead they’re areas (or zones) where the market has historically had difficulty breaking through. It’s also important to be cautious of possible false breakouts that may occur in these support and resistance zones.
Technical analysts use a variety of tools and techniques to identify support and resistance levels, including trend lines, moving averages, and chart patterns. In the next section, we will explore these essential tools in more detail.
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