Support and resistance as horizontal lines

The basic technical measurement of horizontal support and resistance provides the ground floor of technical analysis. Whenever you look at a currency pair, you have to ask where support is and where resistance is. The answers provide the first mapping of the market.

Support is where the price stops falling, and resistance is where it stops rising. The process for locating support and resistance is fairly straight forward. In picture 1 includes several support and resistance lines. Those lines that form floors and ceilings are outer support and resistance containing the price action within a range. Those lines that are inside these larger lines are inner support and resistance.

What is most significant about horizontal support and resistance lines is that they are not lagging. In contrast to indicators, they are projections and form psychological hurdle ones. When price establishes support or resistance, the market recognizes that location as a zone or hurdle that has to be overcome. The immediate future price movements need to probe and penetrate a support or resistance line. One of the first principles of trading forex is to locate a trade near support or resistance.

Once we know where horizontal support and resistance are, we need to also determine the strength of that support and resistance. There are different ways of forming an opinion about the level of strength in the S/R lines- In Picture.1, we can see that the 1.1649 level offers strong support because over 18 months that price point was unable to be broken down and the euro–U.S. dollar (EURUSD) held above it. In contrast, the resistance levels show only one test of the previous high. The trader can conclude that there is greater strength on the support side at 1.1649. If the price moved toward the previous high (1.3689 on 2004/12/01) and failed to go through it, confidence that resistance was stronger at that level would increase. The time interval on a chart also can be used to weight one’s confidence about how strong the S/R levels are. The longer time frames such as monthly and weekly resistance and support are more robust. After all, a great deal of money has had the chance to go through those levels but did not.

In constructing support and resistance lines, the trader needs to realize that there is a degree of judgment. In picture 1, the support and resistance lines are drawn where there appears to be a set of highs and lows. Some of the candlewicks are penetrating the lines. Those penetrations would be viewed as creating temporary levels of new support and resistance, with the stronger levels being those connecting more points. Drawing support and resistance lines need to be done with the perspective that these are zones and not exact lines.

In picture 1, the breakout of the level of 1:3689 has produced a bullish movement important.

Support and resistance as horizontal lines

In picture 2 USD / JPY (above)Horizontal levels based on support and resistance monthly. Note how the breaking of a level causes a reaction of the price.