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Support
and Resistance
Support And Resistance In The Forex Market
By Joel Teo
When the Forex market moves up and then drops back down some,
the highest point that it has reached before the drop down is
now resistance. As the market goes back up again, the lowest point
that it reached before it starts to climb again is now the support.
An uptrend line, in it's most basic form, is drawn along the identifiable
valleys, or support areas. A downtrend line is drawn along the
identifiable peaks, or resistance areas. To create an ascending
channel, you just draw a line that is parallel and that is the
same angle as an up trend line, and then simply position the line
to where it touches the most recent resistance level. With a descending
channel, you just move the parallel line to where it touches the
most recent support level. When the market passes through the
resistance point, that resistance becomes the support. The more
often that the price tests a level of support or resistance without
breaking it, the stronger that area of support or resistance becomes.
Support and resistance are one of the best known and widely used
Forex trading concepts and strategies in the Forex market. It
is important to remember that the support and resistance levels
are not actually exact numbers. Sometimes support or resistance
levels may appear to be broken but it soon becomes apparent that
the market was just testing it. Candlestick charts show shadows
that represent these support and resistance levels. Support and
resistance levels are usually considered broken if the market
actually closes past that specific level.
To help market traders weed out the false breakouts, support and
resistance levels should be considered zones instead of exact
numbers. Finding these zones is a simple matter of plotting the
support and resistance on a line chart instead of a candlestick
chart. Line charts will show only the closing price, without the
highs and lows that the candlestick chart shows. These extreme
swings can sometimes be misleading and cause Forex traders to
falsely react to the market. Plotting support and resistance should
only consider the intentional movements of the market, not the
reflexes of the market.
Using support and resistance to trade in the Forex market is considered
smart by most Forex traders. However, these should be considered
zones and not actual exact numbers. Support and resistance levels
are an important concept and strategy when trading on the foreign
currency exchange. Forex traders use resistance and support levels
to help them understand market trends and to maximize their profit
potential while minimizing their risks. These are just two of
the many tools that are available to Forex traders to help them
understand the Forex market.
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What is Support and Resistance Levels in Stock Trading?
Support and resistance are specific price areas or price levels
which either support prices on declines in up trends or which
resist prices on rallies in down trends.
In an up trend, short term and day traders will attempt to buy
at support or at levels of support. In a down trend, short term
and day traders will attempt to sell at resistance levels or in
resistance areas.
If support and resistance levels cannot be determined, then you
cannot define concise levels in which to establish entry or exit
positions in your specific trade. It is of utmost importance for
traders to develop effective strategies and methodologies for
calculating support and resistance levels. These levels can be
determined with the use of various trading tools like Point and
Figure charts, Fibonacci numbers and Gann angles.
Day traders is in a definite advantage when it comes to the use
of support and resistance levels, in as much that the day trader's
trade normally end when the trading day is over and if a bad trade
or decision was made based on support or resistance levels it
will not be repeated in the next trading day.
Determining support and resistance levels are somewhat different
for the day trader than the position trader. This is because support
and resistance levels for the day trader must be closer to the
current market price that they are for the long term or position
trader. Markets can only drop so far in one day, and consequently
the determination of support and resistance levels by the day
trader must be realistic in terms of what can be expected - however
this does mean that day traders must be willing to use realistic
technical support and resistance levels in order to establish
their positions.
The following rule may appear very simple, yet it is enormously
effective at isolating support and resistance levels and can be
applied profitably in any market:
1. Follow a 3-day moving average of the highs, and a 3-day simple
moving average of the lows.
2. Take the 3-day moving average of the highs to act as your resistance
level, and the 3-day moving average of the lows to act as your
support level.
3. Add a filter by drawing in the support of the lows if the trade
has made a 3-day high in say, the last 3 days (you can use four
or five days, depending on your trading methodology) This means
that you will only draw in the 3-day moving average of the highs
if the stock has made a 3-day low in the last three days - this
means that you only want to sell when the short term is down.
This is a very simple method of trading stocks and commodities
on a daily basis, and if calculated correctly they will work.
About the Author: For more online stock trading information please
visit http://www.stocktradinginformation.net/
- a popular online stock trading website that provides stock trading
information for beginner traders.
