Identifying Support And Resistance

One of the first concepts I’ve learned in trading forex is the idea of Support and Resistance.  The two terms apply in all stocks, commodities, futures trading and refers to a certain level on a chart that price is likely to find “support” or “resistance.”

In theory, all market data shows areas of support and resistance resulting in more activity in terms of buying and selling around such areas.  Some natural areas of support and resistance are certainly whole numbers on a chart. A whole number on GBP/USD could be considered 1.5000, an area where many traders might think it is a good sell and will set their profit targets there.  This might set off a huge downtrend if trader after trader acts the same way.  So, these points again are not “magical” what makes them work is that a mass of other traders use them too.  This is much like the reasoning why Fib targets work, simply because so many large traders and trading institutions trade off of them in concert.

Specifically support is a point where price moves downward to and rebounds off of, indicating buying of the pair, and even some times reversal of a downtrend.  You might here people say, the pair went down and “found support” at 1.4200, meaning there was much interest in owning GBP at this price.

On the other hand, when price is moving upward and hits a point and rebounds downward, indicating selling of the pair.  This can also stall and reverse an upward trend where traders have set their take profit level.  This is a point where buyers are typically staying out of the trade and sellers have stepped in to make a profit.

I’ve identified a few areas of support and resistance we should add to our charts:
1) Whole Numbers, not always something that will reverse a trend, but almost always becomes an area where traders have set stops and take profit levels, resulting in increased buy/sell activity.
2)  Monthly Pivot
3)  Weekly Pivot
4)  Daily Pivot
5)  Previous Day’s High/Low
6)  Previous Week’s High/Low
7)  Previous Month’s High/Low
8)  Fibonnaci Levels,  this is something you need to constantly draw on your charts, or use a Fibonnacci Expert Adviser, but I tend not to trust Fibs I did not draw myself.  These are levels that are routinely traded off of by major trading institutions and big forex traders.  So to ignore Fib levels is to really be operating without knowing where large traders are looking to get in or out.

Support and Resistance with Top Gun Software

I’m also working on an article enumerating the many Support and Resistance levels that are employed with custom Top Gun Software indicators, unique to only that program.  There are many different indicators that are based on mathematical statistics with respect to price volume and how much a pair has moved statistically over a certain period of time.  My new favorite indicator is the “CONTAINMENT BAND INDICATOR” which purportedly averages how much a pair has moved over the last 20 days and draws a containment band on your chart with a midpoint line that acts as a 60min moving average.  Typically price will touch the outer edge of this band and meet major resistance or support and signals the end of that trend.