Support and resistance is such a powerful Forex signal that without understanding its impact on the market, a trader will probably never master the skills necessary to make profits on a consistent basis.
This Forex signal simply registers where price reached a peak or a low. On a higher time frame these price levels can have huge significance. Why?
Getting Behind The Scene
We need to understand what is going on behind candle patterns and price movements. Imagine thousands of traders coming to their desks each day all around the world and processing orders involving billions of dollars worth of currency.
The price at which they bought the currency now represents a key level for them. They do not want to see price go in the opposite direction or they will be at a loss. So what happens? They do everything possible to protect that price level.
The daily chart is of particular importance when considering support and resistance as a Forex signal. Traders associated with big institutions often refer to the daily chart rather than lower time frames. So price highs and lows on a daily chart can represent key, strategic price levels.
If price reached a high within the last few days, you can be sure a number of traders have millions or even billions of dollars worth of currency tied up at around that level or below it. For price to go above that high there is going to have to be considerable buying pressure from the bulls. Obviously the converse is true when price reaches a new low.
So look at the higher time frames like the daily, and 4 hour charts and identify these key levels of support and resistance. They form a major Forex signal.
Where Price Spends Most Of It’s Time
Here is another factor regarding support and resistance that makes it such a critical Forex signal.
Most of the time price moves in a consolidation channel or range. Depending on the time frame you are looking at, it may be a 40 or 50 pip range on the higher levels, and within these larger levels are small trading ranges of 10 to 20 or 30 pips.
Some estimates put the amount of time the market is in consolidation around 60-80%. This means only 20-40% of the time price is actually trending, making new highs and lows.
This piece of information is critical. Once you have identified a trading range (it helps to put lines on your charts marking the high and low of the trading range) you can now manage trades much more effectively.
If you are considering going long and you see price is in a consolidation channel, you will not want to enter near the top of the channel. Wait for price to come back to the bottom of the channel by putting in an entry order and get taken into the trade. This way your stop is closer and your profit potential is greater.
Once price has moved through a major level of resistance, that level now becomes future support. Once price has moved through a major level of support, that level now becomes future resistance.
Include This In Your Daily Preparation
Every day when you open your charts look for this simple yet powerful Forex signal. Mark out your lines of support and resistance on each time frame you use. For example, if you customarily use daily, 4 hour, 1 hour, and 15 minute charts, mark out the key levels of support and resistance. Remember the more candles there are either side of the high or the low, the more significant that level becomes.
Then compare the various time frames and see if any of the levels you have marked coincide. Then look for suitable trading opportunities accordingly.
An effective Forex signal does not have to be complicated. Understanding how support and resistance works can make a huge difference to your consistency as a trader.
Don’t pass over it because it is so simple. Remember, in the minds of the traders who pushed price to key levels, and who are defending positions involving billions of dollars, levels of support and resistance are hardly inconsequential!
By: Michael A Jones
About the Author:
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