It is all about support and resistance

Have you ever wondered why currency pairs, commodities and share price index stop and reverse at a particular point? I’ll bet, you have. The anwer is simple: Supports and resistances. Notice that they are in a plural form. Yea, because we are going to examine different supports and resistances, how to use them, which ones are preponderant, etc.
Support and resistance have been proved as the best method for trading. Hedge funds, central banks and big institutions have their eyes attentive at these area. This form of trading is referred to as technical analysis: where charts and chart indicators are use to determine the market. Opposite of technical analysis is fundamental analysis: where economic events (interest rate, fiscal policies, employment statistics etc) are use to determine the market. However, for the purpose of this article, we are going to dwell on the former system of trading.
Support is a level in the market where a downtrend stops and reverse upwards while Resistance is an area where an uptrend stops and reverse downwards. This is the ‘nucleus’ of trading. Your success in the market is being determine by your ability to determine these places, correctly.
We are going to review some important supports and resistances in the forex market;

Fibonacci Level
Pivot point Level
Moving Average Level
Price levels

Fibonacci Level
Leanardo Da Vinci, an Italian mathematician discovered an interesting fact about numbers. He found the Fibonacci ratios;
The ratios arise from the following set of numbers:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
The series of number is derived by starting with 1 followed by 2 and then adding 1+2 to get 3 the third number. Then, adding 2+3 to get 5, the fourth number, and so on. After the first few numbers in the sequence, if you divde a number by the preceeding number, you get 0.618. for example 55/89 = 0.618

If you divide a number by the alternate number, you get 0.382
For example 21/55 = 0.382

Another ratio is 0.500

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There are other ratios, but these are the most ‘respected’ by the market.
You don’t have to calculate this ratio manually. Luckily, an indicator in your trading software can easily plot these levels for you.

Look around for an indicator called ‘Fibonacci Retracement’. Place at the beginning of a trend and drag to the end of a trend and voila! the ratios will appear on their own.

Pivot Point
The pivot point and associated support and resistance levels are calculated by using the last trading session’s high, low, and close. Since forex is a 24-hour market, most tradersĀ  use the New York closing time of 4.00pm EST as the previous day’s close.

The calculation for the pivot point is shown below:
Pivot point (PP) = (High + Low + Close)/3
support and resistance levels are then calculated off the pivot point like this:
First level support and resistance:
First resistance (R1) = (2*PP) -Low
First support (S1) = (2*PP) – High

Second level of support and resistance:
R2 = PP+ (high – low)
S2 = PP- (High – Low)

Third level of support and resistance:
R3 = high + 2(PP-low)
S3 = low – 2(high – PP)

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Again, you don’t have to perform the calculations. Look around the internet for an indicator that can calculator these. Contact me, if you need one.

Moving Average levels
There are moving averages that can serve as resistance and support. However, one needs to be extra vigilant in order to use this profitably. Examples of good moving averages periods are: 21 ema, 55 ema, 100 ema, 200 ema. NB ’ema’ stands for exponential moving average. Other types of moving averages exist: simple moving average, Light weighted moving average, smoothed moving average. Play around with it and discover the period that best fits into your trading style.

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Price Levels
This, right here is the bread and butter of my trading. Calculations are not performed on this one.
This is a careful observation of charts and figuring out areas where price stops and reverses, connect them with a horizontal line and trade off of them. This system is the most used by professionals and large financial institutions.
Below is a chart that shows the potency of price levels.

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You don’t have to use all these support and resistance levels. There are ones that are preponderant to the other.
Here in, we consider those levels that are watched by most traders. Forex is about staying where the rest of traders are.
Price Levels is the most accurate. It has proven itself over along time that it is worthy of our love.
Support and resistance is our second love. Notice how the same values are obtained every where around the world.
The third is Fibonacci. There is a little problem here. Placing your Fib levels might be a little bit different from the rest of the world. One has to be careful. In other words, a trader should only consider to calculate the Fib levels of obvious levels.
Moving averages are the least in our chain of trust. Why? It is dynamic and there are practically a setting to go round all the traders in the universe.
I am sticking with Chart levels and Pivot Points. Let me here from you.
Happy trading!!!

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