Support and Resistance levelsSupport and resistance levels are built on the basis of chart pivots. One pivot is enough to draw these levels. When a returned price reaches the previous maximum or minimum level and can’t pass it through, usually it is a psychological factor that displays uncertainty of traders about further behavior of price. In this case the price sooner or later breaks through that level and goes further or bounces from the level of previous extreme point and goes the opposite direction. The more times the price reached a certain level and bounced back the bigger psychological effect it produces over traders preventing from making decisions. Support/resistance levels are some kind of light-houses in boundless spaces of financial markets displaying areas where a price can have some specific behavior.
- Support level – is a price level where the price tends to find support as it is going down. This means the price is more likely to “bounce” off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level. Many traders consider this level to be favorable for opening long-term positions that’s why when the price reached this level many of them start to buy currency and a lot of pending orders work out and as a result the price goes up for a while.
- Resistance level – is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to “bounce” off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level. A lot of traders start selling currency at this level price and as a result it decreases for a while again.
Fig.1. Building support/resistance levels.
At the moment price breaks through the support or resistance level a lot of signals to buy or sell occur supported by increasing speed of price movement. The reason is mass fulfillment of orders for closing positions. Often if a price leaves one channel and get into the other its previous support level may become resistance and vice versa.