By Chris Donnell
We previously covered Fibonacci retracements and extensions, pivots, highs and lows, and whole and half numbers (00 and 05). These are all support and resistance concepts. Any decent forex trading system should cover these areas.
We, however, will go beyond those concepts and present such support and resistance strategies as moving averages, the balance point line, trend channels, trading zones, and clusters. Furthermore, the “Once broken, support becomes resistance and resistance becomes support” will be covered as a possibility to include in your forex strategy.
First, we will touch upon the balance point line, designed by a member of “Top Gun Software” who has, remarkably, more than ten years of forex trading experience. It is a proprietary study that looks similar to a moving average, but is a more dynamic forex system indicator. This is a system where the user chooses a certain number of minutes in which they have orders, and the average price is then presented based on that chosen time period. The amount of time can be modified at the users’ discretion. Some of the more common settings are 180 minutes (or 3 hours) and 1440 minutes (or one day). The difference between the balance point line and the moving average is that the former accounts for price activity and volatility.
The moving average is an overview of the average prices in a given number of minutes, hours, or days. As with the balance point line, it is also charted as a line. There are various moving averages that have different mathematical formulas such as exponential and weighted averages.
Balance point line and moving averages are not only areas of support and resistance concepts related to forex trading, but they are also filters. Those, as well as additional filters, will be discussed in subsequent articles.
Next, we will embark on the discussion of trend channels. Traders chart these trend lines, as well. However, they differ in the manner in which they are charted, as trend channels are charted in quadrants. Top Gun Software implements this type of charting. With this charting concept, there are four zones, but only the extreme top line and extreme bottom line can be identified with support and resistance.
Trading Zones are also proprietary and are available to students of Top Gun Software. The advantage is that a thorough analysis is undertaken by a member of the Top Gun team to determine areas where the market is likely to stall or reverse itself. One of these “areas” is another concept of support and resistance worthy of discussing. They are called “clusters.”
Clusters are characterized by several different concepts of support and resistance that actually overlap. Imagine looking at a number of the separate concepts. If you find, for example, a monthly R1 pivot, a simple 20 period daily moving average, and a Fibonacci extension all within close proximity, that could be considered a cluster. This could represent an opportunity, as it could very likely be a “Trading Zone.” The market often stalls or reverses in such an area.
Now let’s take a look at the familiar “Once broken, support becomes resistance and resistance becomes support” concept which is fundamental to many forex trading strategies. A classic example of this idea is when the market is projecting upward, then hits an area of resistance, perhaps several times, then breaks beyond that area of resistance. It may then return down to that area, bounce off of it, and continue to climb higher. This is representative of a time in which the market may have broken an area of resistance, and that resistance acted as support.
To review, we have reflected upon the balance point line, moving averages, trend channels, trading zones, and clusters, and the concept of “Once broken, support becomes resistance and resistance becomes support.”
We will continue this series of articles on forex trading and will present useful tips on the various methods that can be used in actual real time trading near areas of support and resistance. These future articles will guide you through implementing the theory previously discussed and putting them into practice.
It is important to understand that this article is intended to educate and familiarize investors with forex trading systems and not to be regarded or interpreted as investment advice.
Chris Donnell is a full time Forex trader and software developer.