The basic technical
measurement of horizontal support and resistance provides the ground
floor of technical analysis. Whenever you look at a currency pair,
you have to ask where support is and where resistance is. The answers
provide the first mapping of the market.
Support is where the
price stops falling, and resistance is where it stops rising. The
process for locating support and resistance is fairly straight
forward. In picture 1 includes several support and resistance lines.
Those lines that form floors and ceilings are outer support and
resistance containing the price action within a range. Those lines
that are inside these larger lines are inner support and resistance.
What is most significant
about horizontal support and resistance lines is that they are not
lagging. In contrast to indicators, they are projections and form
psychological hurdle ones. When price establishes support or
resistance, the market recognizes that location as a zone or hurdle
that has to be overcome. The immediate future price movements need to
probe and penetrate a support or resistance line. One of the first
principles of trading forex is to locate a trade near support or
resistance.
Once we know where
horizontal support and resistance are, we need to also determine
the strength of that support and resistance. There are different ways
of forming an opinion about the level of strength in the S/R lines-
In Picture.1, we can see that the 1.1649 level offers strong support
because over 18 months that price point was unable to be broken down
and the euro–U.S. dollar (EURUSD) held above it. In contrast, the
resistance levels show only one test of the previous high. The trader
can conclude that there is greater strength on the support side at
1.1649. If the price moved toward the previous high (1.3689 on
2004/12/01) and failed to go through it, confidence that resistance
was stronger at that level would increase. The time interval on a
chart also can be used to weight one’s confidence about how strong
the S/R levels are. The longer time frames such as monthly and weekly
resistance and support are more robust. After all, a great deal of
money has had the chance to go through those levels but did not.
In constructing support
and resistance lines, the trader needs to realize that there is a
degree of judgment. In picture 1, the support and resistance lines
are drawn where there appears to be a set of highs and lows. Some of
the candlewicks are penetrating the lines. Those penetrations would
be viewed as creating temporary levels of new support and resistance,
with the stronger levels being those connecting more points. Drawing
support and resistance lines need to be done with the perspective
that these are zones and not exact lines.
In picture 1, the
breakout of the level of 1:3689 has produced a bullish movement
important.
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Support and resistance as horizontal
lines
In
picture 2 USD
/ JPY (above)Horizontal
levels based on support and resistance monthly. Note
how the breaking of a level causes a reaction of the price.
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