Introduction to Technical Analysis Part 2: Support & Resistance
Introduction
One of the most important concepts in technical analysis is the concept of trend. The technical analyst operates on the assumption that prices move in trends, the goal being to identify the trend as early as possible in order to trade in that direction. Trend can be defined as the direction of the market. In fact, markets rarely move in straight lines but through a series of peaks and troughs that are referred to resistance and support levels respectively.
It is the direction of these successive highs and lows which constitutes the market trend. Hence,an uptrend is defined as a series of successively higher lows and higher highs, while a downtrend is a series of successively lower highs and lower lows.
Support and Resistance Levels
The basic idea behind these support-resistance theory is that the understanding of the future lies in the past. Price levels that were significant in the past will be of importance for the price action in the future.
Usually a support or resistance level is identified by previous lows or previous highs and is a level beyond which process may have difficulty in moving. They are therefore considered important levels in connection with buying and selling decisions.
Big Figures often become psychological resistance or support levels. We see this happen in all markets. The bigger the figure, the bigger the support or resistance.
Price projections and retracements also give areas for support and resistance on a chart. The Fibonacci series gives us a key percentage for both projections and retracements.
Recent Support at 1.1172 can be seen on the EURUSD chart above.
Role Reversal
When a support or resistance levels breaks it often reverses roles, i.e. support becomes resistance and resistance becomes support. So it is important to note old levels of support and resistance for the future.
Trading Strategy
Once a level becomes support or resistance, when the price once again trades to that level a position should be taken on the assumption that the level will once more hold with a stop (and reverse) the other side of the line. It is important to note that the longer a price has been support or resistance and the more times the level has been touched and held the more important the level.
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