Support and resistance with Forex trading
An important part of technical analysis of the Forex market (currency market) and other financial markets, is the concept of support and resistance. Almost every Forex trader, in one way or another, uses this concept and those novice traders who don’t often lose trading capital sooner or later (Usually sooner).
Support and resistance, when applied to trading on the financial markets, represent price levels where supply and demand concentrate themselves, in the opposite direction of the currently existing trend. For example, there could be a downward trend – where there is more seller volume than buyer volume – until the price reaches a point where much buyer volume is concentrated. At this point the buyers suddenly become the majority, and the downward trend is stopped. See the chart below as an example.
Support and resistance levels can be found for all time frames on a forex chart – 5 min, 15 min, 30 min, 1 hour, 1 day, etc – but the higher the time frame, the more important the support or resistance level. See for example the forex charts below. On the left, we have plotted the first weekly candlestick chart of the eur gbp (Euros pounds) and on the right, we have plotted the 10 min candlestick chart of the eur gbp. It should be clear that the resistance point on the week chart – around 0.9420 – is way more significant than the resistance point at 0.8645 on the 10 min chart.
There is always a significant likelihood that a support / resistance level withstands another attack. In addition, a support / resistance gets more important as it withstands multiple attempted breakthroughs. Knowing support / resistance levels can therefore offer a strategic advantage for a trader.
Origin of support and resistance levels
There may be several reasons for this kind of concentration. Often it is a psychologically important price border. A famous example of the stock market is the 1000 points mark of Dow Jones. Between 1966 and 1982 this was the resistance which could not be broken by traders and investors. A couple of times the 1000 points limit was hit, but it was never really broken. When it did happen in 1982, the 2,3,4 and 5000 points mark followed quite easily. Another example is the gold price, which was not able to break above the $ 400 mark from the mid 80’s to the 90’s.
Many novice and recreational forex traders place their stops and profit targets around psychologically important targets. For currency pairs like the euro/dollar and pound/dollar, many exits and entries are focused around the 100, 80, 50 and 20 limit. Stop hunting (trying to stop out position clusters, by dealing rooms of large banks) will therefore often happen around these levels.