An
important part of technical analysis of the forex market (currency market) and
other financial markets is the concept of support and resistance. Virtually
every Forex trader uses this concept in one form or another and the novice
traders who do not do so often lose their forex trading capital sooner or
later. (usually earlier).
Support
and resistance in trading on the financial markets - such as Forex - stands for
price levels where demand or supply are concentrated, in the opposite direction
to the current trend. For example, a downward trend is taking place - with more
sellers volume than buyer volume - until the price reaches a point where much
buyer volume is concentrated. At this point the buyer volume is suddenly in the
majority, and the downward trend is stopped. See the chart below as an example.
There are support and resistance levels for all time
periods on a forex chart - 5 minutes, 15 min, 30 min, 1 hour, 1 day etc - but
the greater the time period, the more important is the support or resistance
level. See for example the forex charts below. On the left is the 1 week candlestick
chart of the eur gbp (euro pound) and on the right the 10 min candlestick chart
of the eur gbp. It should be clear that the resistance point on the 1 week
chart - around 0.9420 - is more significant than the resistance point at 0.8645
on the 10 min chart.
There is a good chance that a support / resistance level
will resist a new attack. In addition, a support / resistance becomes more
important the more often it has rejected an attack. Knowing support /
resistance levels can therefore offer you a strategic advantage as a trader.
Causes of support and
resistance levels
There may be different reasons for this type of
concentration. Often it is a psychologically important boundary. A famous
example of the stock market is the 1,000 points border of the Dow Jones.
Between 1966 and 1982 this was the resistance that investors could not break. A
few times the border was hit, but never really broken. After this did happen in
1982, the 2,3,4 and 5,000 points border followed quite easily. Another example
is the price of gold, which did not exceed $ 400 from the mid-1980s to the
1990s.
Many starting and recreational forex traders set their
stops and profit targets around psychologically obvious targets. For example,
in currency pairs such as the euro dollar and the pound dollar, many exits and
entries are often concentrated around the 100, 80, 50 and 20 borders. Stop
hunting (trying to stop from position clusters, through dealing rooms of large
banks) often takes place around this kind of prices.
Advertisement