$50
3 pips
$50
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A chart that graphs exchange rate movements for a particular currency pair as a function of time can be a trader’s best friend when it comes to identifying optimum places to buy and sell. Experienced technical analysts will scour such charts looking for significant points on the chart where the rate paused before continuing, reversed its direction entirely or where some other reason indicates the level may be difficult to break.
If a significant chart point appears below the market, it would be considered a support point since buyers often select such points to purchase and this activity tends to support the market.
On the other hand, if such a point appears above the prevailing market, it would be termed a resistance point since sellers aggregating around that exchange rate level will tend to provide resistance to a move higher.
Traders, especially those employing range-trading strategies, often seek to identify such points so that they can buy ahead of support, with stops placed just below, and sell ahead of resistance, with stops placed just above.
Types of Support and Resistance
- Reversals – the level at which the market stops moving in whatever direction it was going in and turns back. Look for major tops and bottoms on the chart, as well as shorter-term reversals within an overall recent trend.
- Congestion – typically consists of areas where the market pauses before continuing to move further in the direction it was originally heading. Sometimes, congestion might also arise from a number of reversals all occurring in the same general region of roughly 50 pips.
- Psychological Levels – round numbers, in terms of the exchange rate quotation, that tend to provide psychological targets that longer-term players might use to move into or out of the market at. For example, psychological levels often have importance in currencies in which the USD is not the base currency. Such levels might include 1.5000 in GBP/USD, 0.9000 in AUD/USD and 0.7000 in NZD/USD.
- Support Turned Resistance and Resistance Turned Support – On occasion, the market will gather enough steam to push through a major support or resistance level. In this case, a broken support point will tend to become resistance as traders who bought ahead of it might look to close out for flat, while a bested resistance point will tend to become support.
- Significant Trend Lines - When a trend line can be clearly drawn through a set of higher lows in the case of an up trend or a series of lower lows, in the case of a down trend, that trend line tends to provide support for the market at the point where the line crosses the current time. Similarly, when a trend line can be drawn through a series of lower highs, or higher highs, it creates resistance.
- Fibonacci Retracement Levels – When a major move has an important Fibonacci retracement level or Fibonacci projection point at a certain exchange rate, that level can tend to impede market movement, often forming support if below the current market or resistance if above.
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