Support & Resistance

book-threedimensionalapproachAt the heart of all forex analysis lies the price chart, on which market sentiment and mood is encapsulated in one visual picture, where the bulls and bears battle it out daily for market supremacy.

As a trader with over fifteen years experience, my approach has always had a strong technical bias, based on the price chart which reveals so much about the future market direction. However, to interpret the price action correctly requires experience and practice, but once again I’m here to help, and as you will discover in my books and other educational services, such as in my training rooms, support and resistance are a key feature, and one of the cornerstones of the technical approach to trading.

For novice traders at first glance a price chart can be a little daunting or confusing, and to the untrained eye will reveal little other than a currency pair may be rising or falling. However, through the eyes of an experienced trader, the forex price chart reveals it’s secrets, and just like a glass bottomed boat over a coral reef, the wonders of the market are then revealed.

One of the key concepts I use regularly in all my market forecasts and analysis is that of support and resistance, which many new traders often find confusing, but it is in fact one of the most powerful patterns on a price chart, indicating as it does, price areas where the market has stopped, before moving on in due course.

The concept of support and resistance is best explained by using a simple analogy, and to imagine that you are looking at a cross section through a house with the side wall removed. What you would see would be the floor joists and ceiling joists of each room starting at ground level. Imagine that the market price is now at ground level and starts moving higher, and at some point will reach the ceiling where it may struggle, and possibly fall back, before eventually breaking through and metaphorically appearing in the next room above.

In doing so, the ceiling in the room below, has now become the floor in the room above as the market climbs higher, and as a result has become an area of price support. In other words, in breaking through this price level, or in our case the ceiling of the ground floor room, we have penetrated a key price point on the chart, and for the market to move back into the room below once more, will take additional effort. In effect, this price level has changed from one of price resistance as we approached, to one of price support once the level has been breached.

This simple concept underpins price action across all forex charts, whether on a short term or longer term basis, and is equally important whether markets are falling or rising. These price areas where the market stops and pauses are often referred to as price congestion areas, and the reason they are so powerful is simply that once broken, they then present a natural area of price support or resistance which gives us confidence that the trend is likely to continue, as well as a clear place to position any stop loss orders.