Support and Resistance
In the markets support & resistance has had a recurring nature. When strong support & resistance levels are observed, it enables you to successfully plot your approach, adjust risk levels and manages trades. You can identify support & resistance by the following methods.
Price Action
Many of you think that price action has some special relevance, when you identify support & resistance levels for very strong reason. For example, currency pair AUDUSD , if you look that price has reached at the level of .9956, and then you could confidently say that price of this pair has reflected off, because at this level (. 9956) the sellers get increased than buyers, in the market. This points out that the resistance was observed at .9956.
Psychological Whole Numbers
We always use round numbers, for example my car price is $ 41,555.94 and if someone asks me how much price of my car is? I would say $ 40,000 instead of 41,555.94, exactly this happens in your trading also. Many traders place limits and stops at round numbers like, 1.0000 on currency pair AUDUSD.
The limits or stops that are placed at this level can affect flow order. They act as a stop and a brick wall and reverse price to downward. During an uptrend in market price gets blocked on the up level resisting around the whole numbers and same in downtrend.
Fibonacci
Fibonacci has seen much more ‘creative’ researches on the use of Technical Analysis. It has had a lot flavors but here we would focus on Fibonacci retracements. To plan a Fibonacci retracement, you need to see a trend. For this purpose most charting packages are available by which you may indicate the period for analyzing.
The trend traders would usually hope the original trend returning into the equation. So in the long-term downtrend he may indicate the trend onto the chart. Since the prices come back, during the downturn re-traced period, the trader looks to enter trades with the hope of downtrend back. Some traders use Fibonacci, some use Price Action and Pivot Points’ mechanisms.
Pivot Points
You can identify Pivots Points by many ways. It is support & resistance measuring element.
Pivots are calculated by seeing the past price behavior. How usually they function?
‘Floor-trader Pivots’ is the trendy form of these pivot points. The calculation of ‘Floor-trader Pivots’ can be done by this formula, high+low+close of past periods/3. It’s the average of three prices then you multiply that with 2 and then from this price subtract the “yesterday ‘low”. In this way you will get at the pivot level ‘R1’. Forgetting ‘S1’ pivot level multiply this pivot price again by 2, but this time you would subtract the “yesterday ‘high’.
Which support& resistance element works best?
It’s up to you which strategy do you adopt. All support & resistance levels that we have mentioned before have had any predictive behavior. Everyone is just a probability which you would not be able find out unless the trade finishes.
But it is true that these levels could help you build your approach to work along with those probabilities.
