If you can combine support and resistance levels with something called “market clusters” when you are performing your forex chart analysis, it can yield reliable trading signals that can tell you where you should enter the market and where you should set your stop-loss order and take-profit order. Many times if you read about forex autotrading systems or developing any type of trading system for this market you will hear about using historical price data to backtest a trading system. You can locate a price level for a certain currency pair that is a market cluster if you look at historical support and resistance levels and see that when the market hits a certain price over a given number of months or years that this price level reverses its role of being a support or resistance line as the actual price moves up or down.
Support and resistance lines are very useful for a savvy trader, and one of the main principles of this strategy is that once the market breaks through an established support or resistance line, that line has a role reversal where it will act as a support line if it used to be resistance and vice versa. A support line is below the active price level and acts like a floor, and a resistance line is above the price level and acts like a ceiling. Knowing these levels is useful because if you buy the currency pair then you can set your take-profit level a few pips below the nearest resistance level and set your stop-loss a few pips below the nearest support level in order to maximize the probability that it will be a winning trade.
When you are looking at your price chart (let’s say a 15-minute chart) then you will probably see a few weeks worth of the most current price action depending on how far you zoom in. If you want to find out whether or not the current support and resistance levels are market cluster levels (meaning that the signals they relay can be more reliable) then you will want to scroll back in your chart over the past months and years to when the market was at the same price it is now, and see if the support and resistance levels that you have identified were also applicable in the past. If you see that every time the exchange rate is around a given price that the same levels act as support and resistance levels, you will know that these are market clusters and that the trading decisions you make based on the relationship of the current price to these levels will be reliable.