Levels of support and resistance

Levels of support and resistance

Forex supports and resistors

What makes this concept one of the most important forex indicators for the price reaction?

Once you understand the fundamental meaning of support/resistance your negotiation automatically rises to another level. What's the reason? Because there are levels in the market that have been respected for the price in the past and will be in the future, and now you can lean on it!

So you can understand the concept think about who the big market speculators are, and how and why they move the price.

UBS-trading The big fish of the banks and the big financial institutions are not like us, the retailers. To begin with, a large financial operations institution can hire dozens or even hundreds of merchants to manage their portfolio:

UBS ' gigantic arbitration hall is full of professional forex traders. Meet your opponents!

Since each of these traders negotiates – potentially – in a differentiated way, the banking risk is supposedly extended by different styles, temporary frames, etc.

And, of course, the combined task of all those traders moves the market a lot, much more than we, the retailers, could ever move it. It's a real case of whales and sardines (or should we say shrimp?).

Bank traders will perform operations paying particular attention to certain levels. They may have a list of those levels, and the research departments assigned to your bank will periodically notify you of the levels of the market to be monitored.

There's evidence of this in any bank report.

Here is a sample of bank statement to illustrate:

"Daily technicals"

EURUSD – Upward

A rupture above 1.2824 would extend its most recent strength to 1.2935. The stand is in 1.2626.

USDJPY – Downward

The risk lies in checking the relevant support area at 77.91-77.66. The resistance is in 79.03.

GBPUSD – Upward

The relevant resistance is in 1.6052 – a rupture above would imply a bullish development in the Act.

The stand lies in 1.5930 ahead of 1.5882.

... and the same for all the variety of currency pairs.

Thus, forex banking traders are monitoring certain levels. They will also have to meet certain orders for their customers, if that is the nature of their negotiating role with the bank. For example, they may have to make a big sale or purchase of the yen against the dollar for a Japanese car manufacturer.

The merchant will try to obtain the best possible prices for the manufacturer, and may need to scale in position, depending on price fluctuations throughout the session or day of negotiation.

This trader can then concentrate specifically on a short-term price level that he is watching, and as the price approaches that level, he will be very careful when scaling positions for the manufacturer. Of course it may also be the case that the level you are observing represents an excellent opportunity to execute the manufacturer's order partially or totally.

Either way, when the price reaches the level, the trader can place a very large order, causing the price to bounce up or down depending on whether the order was buying or selling. This is the natural and fundamental reason why large price rebounds are produced at significant price levels: weight-dealers are looking at those levels with great interest.

So in what way is this represented in the charts? Here's an example:

You should not need an indicator of support and resistance to draw the line that crosses the logical levels of support and resistance in this graph.

Here we see the price dropping to the left of the screen. The blue line symbolizes a level of support/resistance still unconfirmed. When the price breaks for the first time that level downward, it makes a brief retest (the first arrow) and then decays. Subsequently, the price touches bottom and begins to ascend.

When it returns to the Blue Line – the level of resistance – fails not once or twice, but three times before breaking it and opening its way up. This is the first sign that an old price level has become a support/resistance level.

The price moves away then from the Blue line up before returning to check it again. This behavior is tremendously usual, and it makes up the fundamentals of negotiating all levels of support/resistance so sought by the traders.

Notice how the price makes a retest of the area surrounding the blue Line twice, and moves twice upward. This reconfirms that the level marked by the Blue line is a significant level of support/resistance and the negotiators will know how to recognize it.

There are many reasons for an arbitrary price level to become a support and resistance area. Factors such as round numbers, pivots, etc ... contribute to that. Or it may simply be that, for one reason or another, this price zone was an area in which a huge volume of negotiations took place in the past. Since then, the market "remembers" this area and the price will tend to react every time you see it.

Why is this happening?

Imagine you had sold a very large order of currency pair AUDUSD to 0.9590 cents. You bet the price wouldn't exceed that level up. But you were wrong, and the price took strength and went up to 0.9650.

Now you are 60 pips below, if you're still in the negotiation. You're probably in trouble. You will be praying that the price returns to your entry level – 0.9590 – so you can leave the operation without loss. And this is the essential and fundamental dynamics of the performance of support/resistance levels.

Because, imagine now that the price falls to your entry level. You're out of the operation. How? Buying a couple of currencies. If your purchase order is large enough it will cause the price to bounce upward. You will have practically removed the price of the old resistance level that has now become-thanks to you-in support. The support/Resistance line has gone from resistance to support. Is it simple or not? Yes it is, and tremendously effective.

The levels of support and resistance constitute, by far, one of the best forex indicators for the negotiation of the price action. It is also one of the crucial concepts for any trader, so mastering it will guarantee your progress as a trading in forex markets.

However, although it seems simple, it is an area that offers great richness of potential analysis, much more than a single Web page can cover. There are several free resources available on the Web, although – as is the case in most cases-your content is at the height of your gratuity, and if you want quality material you will have to look for payment resources.

If you do with all the information given in this course you will be able to easily configure your own system of negotiation of support and resistance.

The next item in our Forex indicator series is about round numbers.