By Chris Donnell – Just what is meant by support and resistance? Support and resistance are price points in the market where momentum and/or movement may decrease, halt, or change direction. It is a major component of many currency traders Forex Strategy.
We should give a definition of these terms for those with little experience in forex trading.
Support is a section where the price or the exchange rate movement or momentum could possibly stall, stop, or reverse direction in a down-trending market.
Resistance is a section where the price or the exchange rate movement or momentum could possibly stall, stop, or reverse direction in an up-trending market.
Movement denotes the direction the exchange rate is headed.
Momentum signifies how quickly the exchange rate is going in a given direction.
What are normal areas where support or resistance is found?
A number of classifications are considered, such as: price extremes, trend lines, psychological areas, Fibonacci areas, and pivots.
We will first look at price extremes. One form of price extreme is the statistically anticipated top or bottom of movement during a specified time period. Bollinger bands, containment bands, and range projections are examples of price extremes in currency trading. In each of these examples, forex systems utilize mathematical formulas to anticipate the total movement in the market based upon historical data.
Another group of price extremes are the daily, weekly, and monthly highs and lows. That is, when the price is reaching the previous week’s high, several buy and sell orders are put in there, affecting market activity when it is nearing that general vicinity. Movement or momentum will probably stall, slow, or reverse as it nears that weekly high. These sections may further be utilized as trend indicators, but that will be the subject of a separate writing.
At this point, we will look at trend lines. A trend line is created by a succession of bars highs or lows. Whenever the trend line is breached, it may be a sign to either enter or exit a trade. Such a time may further denote a section of support and resistance. Trend lines may be drawn to describe any time period of interest. Traders will consider these on monthly or weekly charts to determine sectors they feel will define support or resistance. Trend lines depicting a longer time frame, such as monthly, will depict a more probable support or resistance than those showing a minute-by-minute chart.
Psychological areas are normally reflected by whole and half numbers. For instance, should the exchange rate for the EURUSD by 1.2500, it would be said that it is a whole number. In this example, a half number would be 1.2550. These are positions of support or resistance as it is likely that many buy and sell orders would be given to a forex broker at these points.
In addition, Fibonacci levels are believed to indicate support and resistance. Why is that? This is due to the fact that many professional traders analyze them. And these professional traders may have orders of such magnitude that they are capable of moving the market. These levels may be further described as Fibonacci retracement areas, .38, .50, l62, or Fibonacci extensions, 1.48, 1.62, or 2.00. The market will generally not move beyond the 1.62 extension.
Pivots are price averages calculated on historical data. The calculated daily, weekly, and monthly pivots are used by traders to make decisions. Again, the monthly pivot will more probably reflect an area of support or resistance than the daily pivot. A discussion of pivots is too long to be adequately dealt with here, so you should read additional articles, watch other videos, and choose pivot options on your charts to observe price action in these areas.
Notice that the word “area” was selected. Support or resistance is generally not defined by a certain price. It is instead a general area surrounding that price.
Channels, trading zones, and clusters are additional concepts of support or resistance which we will address in separate writings. In addition, we will cover the theory of “Once broken, support changes into resistance and resistance changes into support.”
This writing must not be thought of or considered as investment advice. Instead, it is intended only as informational material to assist in prompting your consideration of your manner of trading.
About the Author
Chris Donnell is CEO of LeverageFX.com. We create cutting edge Forex Trading Software and Systems.
