Occam's razor is a principle of parsimony stating that the simplest theory is always the right one. According to this principle, the Support and Resistant approach is one of the best. It is a very simple forex strategy which usually works. Its validity has been tested over and over again throughout history of forex trading and remains one of the most widely used strategies. In is easy to implement and is suitable for beginners of forex as well as for intermediate and advanced traders. The strategy is based on the forex crowd psychology. Of course, nobody can predict the future and nobody can predict the movements of the market, however, sometimes the market moves in such a way that the prediction is possible.
On the very basic level the support is a point where the price has difficulty dipping below it because the demand is sufficiently high at that level. Support levels are always on or below the current price. In other words, the support line is where the price stops falling. Here is an example: Resistance is the opposite of support. It is a price level where the market has difficulty passing that price level because selling is at that point. Resistance levels are always on or above the current price. It is where the price level stops rising. Here is an example
Every time the currency pair touches the support or resistance line, it strengthens its validity. It may represent a psychological barrier of the "forex herd" at that price which prevents it from dipping below the support line or crossing over the resistance. The support and resistance stronger if they are represented by even and round numbers such as 1.75 and so forth . The psychological pressures are greater at these numbers.
How does it work? Simple ! Look for the support and then the resistance. Buy near the support, and sell near the resistance.Lots of forex traders have successful careers based on this simple forex strategy. Try it out on a demo account and see how you can profit from support and resistance.
However, when the resistance or support is broken, the sentiment is no longer here and the price may fall or rise very sharp (see the second figure).
Of course, everything we have been discussing thus far is based on history and probabilities. The price can easily dip below the support levels, and conversely, it can easily break through the resistance levels. You are a smart one, and already know how to protect yourself from a disaster. You guessed it. Always have a stop loss! The stop loss is another basic tool which every beginner of forex should now.
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