I believe that Support and Resistance are the most infalliable of all market trading strategies. I also believe that a lot of consistantly successful trading methods have a core at S&R levels, whether they know it or not.
If you unsure of why S&R is so important, here is why:
All the money you make in the FX is a DIRECT result of price action. You buy/sell at a price and close it at another price and that is how your profit is determined.
So what determines price action? Market participants buying and selling at these prices! So any movement means that the NET buying and selling activity will be weighted in either the participants buying or the ones selling. Trends are based on this even, when the net sentiment of this goup of participants is consistently weighted in either buyers or sellers for a length of time. Of course the size of your position affects market reaction, so the participants with the most money will move the market the most.
Now how do we know what these large market participants are thinking?? Well they are looking at the economic fundamentals of the currencies, valued against each other, the current financial markets’ actions, and of course the actions of other large market participants. So perhaps we could assume that what they are thinking and acting on is based on those events (and the proof lies in the huge market shifts following important economic reports).
Now here is the best part: We, as retail traders, have largely the exact same opportunity to observe the same information that large market participants are watching! Now if following all that sounds like a lot of work, it is, and it requires full time attention, hence why it is a full time career to be a currency analyst.
But there is a shortcut! If these large market participants are the major price movers, then following their decisions, which are being played out for us in real-time as price action, could still net us a hefty profit.
Support and resistance areas are a way to translate a shift in net buying/selling activity into a likely direction for future price action. And many times, even the big professionals can’t make direct decisions based on the fundamentals, and so also rely on this SAME principle to base their activity.
So I thought it’d be interesting to get a discussion going about how each of us attempts to determine these key support and resistance levels, assuming you buy the story that they are important!
I like to think of a [B]R[/B]esistance as the rejection of a [B]R[/B]ally, and [B]S[/B]upport as the rejection of a [B]S[/B]ell-off
Questions are great too, I bet some excellent insight could be offered by some of the traders on this forum