Support and Resistance in the Forex Markets

As any surfer will tell you, there is an exhilarating feeling of contentment when you catch a wave and ride it for all it is worth. Not so much when you fall off too soon or even worse miss it altogether. Forex traders will immediately recognize the analogy. There is a strong similarity to trading when you enter a position just as the market is turning and stay with the trade as long as it is trending in your chosen direction. Likewise traders will relate to being stopped out of a position too soon and also the missing of opportunity when it comes knocking. One of the many challenges of Forex trading is identifying that sweet spot when time and price come together to mark the changing of trend. Identifying these areas where the buying and selling begin at trend changes in real time is the professional trader's bread and butter. Even if you get it right only half the time, with well managed risk strategies you could easily become very rich. Where buying occurs in sufficient strength to overcome previous selling and reverse the direction of the trend are known as areas of support. Conversely resistance is the term used to identify an area of strong selling, enough to soak up all buying and reverse the trend downwards. Keeping it simple: Buyers overwhelm sellers at areas of support and sellers overwhelm buyers at areas of resistance. A lot of traders watch the moving averages for areas of support and resistance. Some use simple moving averages while others prefer exponential moving averages which are weighted towards more recent activity in the market. I can't say that this is a reliable enough trading method for me to want to adapt it as my means of identifying support and resistance. I do like to watch a 12 period exponential moving average (12ema) on any time frame though. It seems to act well as a region of balance between buyers and sellers and price activity does tend to hover around this moving average a great deal of the time. Any market that has traded well away from the 12ema though is probably getting ripe for a turn. It's also very common to see a market retrace to the 12ema line then continue in the direction of the trend. Any strong breaks through the 12ema usually mean the trading will continue in that same direction. It's part of every trader's arsenal to know about Fibonacci based retracements. The most notable are the 38.2%, 50% and 61.8% retracement levels although there are other retracement levels that are not based on Fibonacci that are just as important. We can find support at areas of old resistance and vice versa. This happens fairly often so it needs to be on a trader’s radar. It’s not a guarantee of course that all areas of support will become resistance but add this concept to your awareness when reading a chart. The past tends to repeat itself in one variant or another. While not necessarily areas of support and resistance, gaps in the market can mark important points on a chart. There is a well known phenomena that gaps on a chart will sooner or later be filled. This simply means that price action will often trade into the area of the gap, effectively closing or filling it. The warning here is that sooner or later may mean much later so don't expect this phenomena to be reliable on your chosen time frame. Failed attempts at closing the gap signal market weakness and you can expect a strong move in the opposite direction. Probably due to the fact that we chart market activity in graphical format we are somewhat trained to think of support and resistance as being horizontal or parallel to the time axis. Support and resistance can also be seen in other ways if we break out of the horizontal mind-set. For example support and resistance are often found on the drawing tool known as Andrew's Pitchfork. Also known as the median line this tool was reputed to have been the instrument whereby its inventor amassed a large fortune from trading. For my own trading I have developed a couple of original tools as well as some older, well known tools modified to help me get very close to areas of potential market turns. One of these tools, Trigforks as I call them help identify areas of support and resistance more accurately than pitchforks. I also use an original price projection calculation to project potential price levels where market turns may occur. Often it is accurate to less than a pip which really helps to lower risk. A Forex trader's best weapon is the long and diligent study of market behavior with particular emphasis on analyzing and forecasting where probable future areas of support and resistance may lie. Good luck and happy trading.