Learn forex trading by developing a forex system that is proven, tested and simple to apply. Understanding technical analysis gives you the edge as a forex trader. It develops your confidence in your analysis of what will happen in the markets in the future. But the most important drawback with most of the technical indicators is that they lag behind the markets. Lagging means part of the price action has already taken place before the movement is reflected by these technical indicators.
However, support and resistance levels especially those based on Fibonacci levels are considered to be leading indicators because they lead the markets in predictable paths. Now, when we say predictable, it does not mean guaranteed. But it can be pretty close. Support is the price level that a currency pair has trouble breaking through to the downside. Support is also referred to as the floor of the currency pair price movement.
Resistance is the price level that a currency pair has trouble breaking through to the upside. Resistance level is also known as the ceiling of the currency pair price movement. Many new traders are surprised at the strangely predictable and reliable price action that takes place at the support and resistance levels. Most of the time, they will find the price action oscillating between the two levels in a market.
Why it is so that majority of the traders begin buying and selling at the given support and resistance levels. There is nothing on the charts that forces the forex traders to do so.
A simple explanation is this that majority of the forex traders think the support level as the best price available to them and considers it an excellent opportunity to buy once it reaches the support level. You will have an advantage in your currency trading if you are capable of accurately identifying the support and resistance levels in the markets. As more and more traders start using technical analysis in trading and calculate the support and resistance level, the more these levels become self fulfilling.
One important indication of support and resistance levels is that price level is reached a number of times but it is never breached. Support and resistance levels can be horizontal for a ranging markets or they can be sloping up or down for a trending market. Now, what happens at the support level is that as traders begin to sell the currency pair and take profit, the price of the currency pair drops down. As the price starts to fall, other traders who are interested in buying the currency pair keep on watching how far it will go down.
Most of them have done their calculations as to how far the price level will fall down before they can place a buy order. Past price action has convinced them the price offered at the support level is the best price under the present market conditions. So when it reaches that level, most of them start buying. When there are more buyers than sellers, the price of the currency pair starts to rebound and rise. It rises till the resistance level determined by most of them when majority decide that the currency pair is now over priced and start selling.
This oscillating price action keep on repeating itself until and unless there is a fundamental shift in the markets that forces new levels and a new direction.
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Tags: Forex, Resistance, Support