There are many materials written about forex trading – both high-quality articles and low-quality pieces. Sadly, most of the worst are written about support and resistance levels. This is a remarkably important topic for Forex traders. But still, the quality of widely available research and advice in this industry is mostly poor.
Two main questions need an answer: which direction is the price will possibly move substantially? At what price will it turn in that direction following a movement in the opposite direction?
Answering only one of these is typically enough to trade profitably. However, answering both will do much better. The levels where the chances of turns are relatively high is what they call the ‘support and resistance.’
In forex trading, support and resistance have especially extreme importance. And this is because forex often moves with less direction and range more than most commonly traded stock indices and commodities. And these are the reasons forex traders typically become obsessed with attempting to guess these levels before the price reaches them correctly – they give opportunities for low risk, high reward trade entries.
Though people think of these levels’ importance as the key to profitable forex trading, some claims are there to identify them best. One known claim is that round or whole numbers, key moving averages, pivot points, and other derivative indicators usually act as effective support and resistance levels. But there is no evidence for this.
In some cases, the claim is when such levels are confluent with more intelligently identified support and resistance levels, the levels become stronger and more valid. But like the first one, there is no evidence for this.
Then for direct price levels, some traders swear by daily, weekly, or monthly high and low prices – sometimes opening prices of different sessions. And there might be two reasons such levels can become effective and other times they won’t.
First of all, daily of weekly high or low prices have sharper, faster hits and rejections. With that, they tend to be more effective than when the constituent price action is different. Second, it generally depends upon the broader context of what the price does.
When the price is in a strong upwards trend, previous daily or weekly high prices might not be very effective resistance levels. Meanwhile, in a strong upwards trend, the price might not hit such support levels usually either. The bottom line is; do not expect to get an edge from any formula. Traders must learn to read a chart intelligently and think of the prevailing conditions when the level is hit.
Now, the perfect market condition where traders must use support and resistance levels as a major basis for trading decisions is the absence of a trend. A lot of traders often make the understandable mistake of looking for support levels in an uptrend and resistance levels in a downtrend. Though there is nothing wrong with that, traders might not want to sit out a strong trend without taking any trades because the pullbacks never reach the target levels.