Support and Resistance - What Everybody Ought To Know

Support and resistance is one of the most frequently applied terms in technical analysis.

When I think of support and resistance in financial market, I think of support as the level where the market gets boosted and the resistance as the level or area where the market gets busted.

Support also known as troughs or dip or reaction lows is the level where buying pressure is greater than the selling pressure. So at this level, the bulls are in control and thus take the price to a higher level.

Resistance also known as peaks or rally or reaction highs is the level where selling pressure is greater than the buying pressure. So at this level, the bears now gain control and thus drag the price to a lower level.

DEFINITION OF TREND

Having learned support and resistance, now we refine our vocabulary and explain trend in terms of these new word power.

An uptrend consists of higher highs and higher lows.

In another words, for an uptrend to continue, each successive rally high (resistance level) must be higher than the previous rally high and each successive rally low (support level) must also be higher than the previous previous rally low.

In this figure higher highs and higher lows signal an uptrend.

A downtrend consists of lower lows and lower highs.

In another words, for a downtrend to continue, each successive rally low (support level) must be lower than the previous rally low and each successive rally high (resistance level) must also be lower than the previous rally high.

In this figure lower lows and lower highs signal a downtrend.

Every time market tests support and resistance level, the trend is in crucial phase.

In an uptrend when market tests the resistance level, it must penetrate and exceed beyond the previous resistance level in order to maintain the uptrend.

In the case of downtrend, when market tests the support level, it must penetrate beyond the previous support level in order to maintain the downtrend. Failure to do so potentially gives rise to trend reversal and also the role reversal of support level and resistance level.

SUPPORT AND RESISTANCE ROLE REVERSAL

In an uptrend when market tests the resistance level if it can not penetrate and exceed beyond the resistance level a trend reversal, potentially a downtrend, is in progress.

Similarly, in a downtrend when market tests the support level if it can not penetrate and exceed beyond the support level a trend reversal, potentially an uptrend, is in progress.

As this trend reversal progresses, the support level and the resistance level switch their role.

I think of the trend reversal scenario in conjunction with a mountaineer climbing the Mt. Everest. As the mountaineer approaches the summit she/he is also reversing the role from ascent to descent unless one decides to settle down at peak of the Mt. Everest.

PSYCHOLOGY BEHIND SUPPORT AND RESISTANCE AND THEIR ROLE REVERSALS

Trading is a psychological warfare among traders of all size and from all over the planet. In our attempt to understand psychology behind why and how support and resistance works so beautifully in trading we will attempt to decode psychology of traders in any market.

The traders in any market can be categorized as: the longs, the shorts, and the neutral.

Traders who have bought positions are said to be longs. Shorts are traders with sold positions. And traders who are uncommitted to any positions are said to be neutral.

For the illustration matter, consider a forex market hoovering some where at around support area. Now assume the market gather steams out of good news and thus starts to move higher from the support area.

In this figure, wave 2-3-4-5 shows how as the downtrend reverses, resistance becomes support.

Now the real mystery of trading begins to unfold gradually.

The longs, traders with buy positions, are glad that the market price is moving higher in their favor.

The shorts, traders with sell positions, begin to panic as they realize that they are on the wrong side of the market. They are at this moment praying that the market would dip to their break even point so they could get out of the market and set their foot on the right side of the market.

The higher market price should send wake up call to the neutral party. Then they desire to enter the market on the long side on the next favorable buying opportunity.

Hence all the traders have vested interest in that support area. Should the market price decline close to that support level, all the three group of traders will act on their vested interest by initiating long positions which in fact pushes prices higher.

However, if the prices start to move beyond the support level, the reaction just becomes opposite.

Traders with long positions are the one now praying as the price advances against their favor. They are hoping they could get out of the market at break even point. And they desire to cover any losses by initiating short position on the next favorable selling opportunity.

The shorts are partying as the prices decline lower and lower in their favor.

The lower price once again wakes up the neutral party to jump on the bandwagon on the sell side.

In this figure, wave 4-5-6-7 shows how as the uptrend reverses support becomes resistance.

And in a very sleek manner, now the market has gone through remarkable metamorphosis. Support has become resistance.

Now all the traders have their vested interest shift to the resistance level. Any price bounces or rallies will hit the hard ceiling formed right at around this resistance level.

SIGNIFICANCE OF SUPPORT AND RESISTANCE

The significance of any support and resistance level is established based on three factors:

1. the length of time spent,
2. volume of trading and
3. how recently the trading took place.

If the market price spends longer time near a support or resistance level, that level of support or resistance become more significant.

For example, if price trades sideways for four consecutive weeks near support level before advancing to next higher level, that support area is considered more significant than if only four consecutive days of trading had taken place.

Volume is another leading factor in determining the significance of support and resistance level.

When support and resistance levels are formed on heavy volume, it indicates large interest of traders near that support and resistance levels. Hence it makes that support and resistance level important.

The last but not the least way to identify the significance of the resistance and support level is by identifying how recently the trading took place. The support and resistance are ultimately the by-product of market participants' reaction to the price movement. So the more recent the activity, the more influential it becomes.

In other words, the reaction of the market participants' is more eye-catching near fresher support and resistance level.

ROLE OF ROUND NUMBERS AS SUPPORT AND RESISTANCE

A round number is informally considered to be an integer that ends with one or more zeroes (0), such as 10, 100, 1000, 15000....etc.

Market price tends to stall advances or declines around round numbers. Therefore these round numbers act as a psychological support or resistance level.

As a rule of thumb, as the market price approaches round numbers it is wise to take following actions:

1. begin profit taking and
2. avoid placing trading orders.

News Trading -The Must To Do Lists

News trading can be very profitable strategy provided traders perform their due diligence prior to pulling the trigger. Traders can make handsome return on investment (RoI) in a short span of time.

I particularly trade Non Farm Payroll (NFP), the U.S. job data number released monthly, on the first Friday of the month.

I've collected 30, 50, 100 pips in a matter of seconds and minutes.

Be that as it may I've also experienced the market tumble against my position wiping out my all gains from the previous month in just under 30 seconds. So news trading could be both risky and volatile in nature.

News trading may not suit every trader's personality type.

However, if avid risk taker trader can not resist the temptation to trade fundamental news releases she/he must first determine her/his news trading strategy. It's a MUST and number ONE priority in the to do lists.

When I first considered to trade fundamental news, the first strategy that I put in practice was to demo trade several times until I felt confident about doing it.

One of the most valuable lesson that I learned during this process was to treat my demo account as if my real account.

Let me pour my news trading strategy for you to help you create your own strategy.

Do not attempt to skip the steps I'm going to describe below or else be prepared to pay expensive tuition cost for your lessons.

NFP data is released monthly on first Friday of the month at 8:30 A.M. E.S.T. sharp.

For example, NFP data for the month of November is released on first Friday of December at 8:30 A.M. E.S.T. sharp. So note this time in your trading calendar or trading schedules.

News trading is a risky business.

Let me clarify further if I may.

First, I will start with money management.

Next, I set my entry size at 1%-2% of the actual account size with mental stop loss and limit order at 50 pips.

Next, I choose the trading platform with fastest available execution speed. I also check with my forex broker for any possible slippage and set the range of slippage.

The final important task for me is to do an extensive market research before NFP to come to a conclusion what the NFP data will likely be.

Most importantly I anticipate what the traders are expecting out from the data.

Is the data going to send any inflationary news to traders and the financial planners all across the globe?

Many traders primarily focus on job data number as an indicator to the economic health of a country. Trading is all number game. What is most important to understand here is the message this number will render to different traders/investors/fund managers.

If you can transcribe this message then you will be far ahead in the game.

For example, say economists expect job loss of -10K and I come with similar conclusion I will most likely trade NFP.

When the data is released, if the NFP data is at or near -10K, this is bad news for the U.S. dollar and will hurt but if the job loss is surprisingly greater then expected the U.S. dollars is going to tumble deep down.

So based on this analysis I take long position on EUR/USD five minutes in advance. This is to avoid any slippage at the time of the news announcement.

My market open price is at say 1.4500. I have my mental stop loss and limit at maximum of 50 pips loss and profit at 50 pips is in tact.

But I won't place these stop loss and limit order in a broker platform until the market hits my stop loss. I will be watching the market moves like a hawk to close my position profit or loss at my specified destination.

As for profit, if the market is running in my favor and the data release is say surprise of -25K more job loss than expected then market will likely take the U.S. dollar further lower.

In such scenario, I will then only actually place my stop loss order at 1.4550 after it has crossed that mark and let it roll as I'll have my profit secured whether the market makes further advance or not.

Should you not feel comfortable trading such hours, you'll be wise to stay away from. On the flip side, if you follow these above guidelines, you should be way ahead in this game.

Lots, Leverage, and Profit and Loss

In the past, spot forex was traded in specific amounts called lots. The standard size for a lot is 100,000 units. There is also a mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units respectively.

Lot	Number of Units
Standard	100,000
Mini	10,000
Micro	1,000
Nano	100

As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss. 
Let's assume we will be using a 100,000 unit (standard) lot size. We will now recalculate some examples to see how it affects the pip value.

1. USD/JPY at an exchange rate of 119.80 (.01 / 119.80) x 100,000 = $8.34 per pip
2. USD/CHF at an exchange rate of 1.4555 (.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not quoted first, the formula is slightly different.

1. EUR/USD at an exchange rate of 1.1930 (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
2. GBP/USD at an exchange rate or 1.8040 (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

Your broker may have a different convention for calculating pip value relative to lot size but whichever way they do it, they'll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading.

WHAT THE HECK IS LEVERAGE?

You are probably wondering how a small investor like yourself can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies. All the bank asks from you is that you give it $1,000 as a good faith deposit, which he will hold for you but not necessarily keep. Sounds too good to be true? This is how forex trading using leverage works. 

The amount of leverage you use will depend on your broker and what you feel comfortable with. 
Typically the broker will require a trade deposit, also known as "account margin" or "initial margin." Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded. 
For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account. No problem as your broker would set aside $1,000 as down payment, or the "margin," and let you "borrow" the rest. Of course, any losses or gains will be deducted or added to the remaining cash balance in your account.
The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position. 

HOW THE HECK DO I CALCULATE PROFIT AND LOSS?

So now that you know how to calculate pip value and leverage, let's look at how you calculate your profit or loss.
Let's buy U.S. dollars and Sell Swiss francs.

1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the "ask" price of 1.4530, or the rate at which traders are prepared to sell.
2. So you buy 1 standard lot (100,000 units) at 1.4530.
3. A few hours later, the price moves to 1.4550 and you decide to close your trade.
4. The new quote for USD/CHF is 1.4550 / 1.4555. Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the "bid" price of 1.4550. The price traders are prepared to buy at.
5. The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
6. Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote. When you buy a currency, you will use the offer or ask price and when you sell, you will use the bid price.

Forex Trading Robots - Myths and Mysteries?

Absolutely...forex trading robot work! Do you believe it?

If everyone is using some kind of automated forex trading systems that make them money when they are sleeping why isnot everyone filthy rich?

Why is not everyone vacationing all year round instead tied to 40 hours a week JOB (=Just Over Broke) for 40 years just to retire with mere 40 thousands in retirement account.

Only one person can really answer if automated forex trading systems actually make money. And that person is no other than YOU.

Robots have evolved to become our closest ally along with our own evolution.

We use robots in industries to assemble cars. Robots fabricate semiconductor chips that is used in my cell phone, computer and many other electronic devices.

In cattle farms, robots feed cattle, milk them and even "baby sit" them in absence of the farm owners 24/7.

The bottom line is this: many of the high-tech devices to high-tech industries ranging from cell phone, and computer to cattle farms to modern airplanes depend on robots in one or the other way because they work.

So the obvious question to ask is why can not forex trading robots (aka Expert Advisor EA) make money for me when I am sleeping?

Our drive to implement forex advisors, system trading or trading robots in our forex trading emerges more from our inner desire to become social human beings rather than merely to hoard piles of cash.

Of course, it will be nice to make money in this process of wanting to be social species.

The very dynamic forex market that is opened 24/6 days a week with high end income possible make it plausible field to deploy army of automated forex trading systems, forex trading robots and, forex simulator, that can make money around the clock even when we are sleeping.

In fact, I would be happy to sail across the globe while I let my army of forex advisors make money for me.

If I could achieve this goal through forex robot trading, then every forex trader should be able to duplicate my process. So in the end, everyone implementing forex forecast software should be rich, famous, etc...etc...you got the picture.

But the truth of the matter is - it's just not practical for one fundamental reason - unlike living creatures, forex trading robots lack intellect of its own to guide its own action.

If it did own its own unique intellect then it won't need us. It won't be feeding and milking cow.

That's a really good news in one sense or else our world would have already ended up just as one as portrayed in the movie Terminator.

Automated forex trading systems does one and only one thing - it works in a good faith just as its programmer programmed it to do so.

It can analyze huge amount of historical data to sort out the trend. It will watch the forex market on guard 24/7 for 365 days a year. And best of all it will never ride emotional roller coaster that almost all the beginner forex traders ride on.

However, forex trading robot can not learn on its own the very dynamics of day to day forex market moves. Forex, as you must have noted, is a huge dynamic market with myriads of variable to count on.

Sure we can feed few major variables to forex simulator, and forex forecast software to get an approximate picture of where the forex market was day before and where it is heading next day, next week or next year.

But the biggest challenge of implementing automated forex trading systems lies in knowing if forex trading robot can consistently yield good return as the preacher and creator of many forex advisors and forex forecast software claim.

The answer to this question could be multi-fold: Yes, Maybe, and No.
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Yes, forex expert advisors (EAs) can make money while a trader is sailing in Anguilla beach but big BUT here...the trader must be able to navigate forex trading robots through the dynamic forex market conundrum.

Allow me to elaborate on it.

It is probably easier to make an analogy between forex trading, and flying a mammoth Boeing 707...

The hardest part of flying the mammoth Boeing 707 is not actually flying but taxing.

The Boeing seasoned pilots are trained for many hours for many years just to be able to accomplish successful taxing, i.e. landing and take off besides many other intensive training.

Once the Boeing attains desirable height on air, flying the mammoth Boeing 707 is easy because autopilot can navigate it to its final destination with minimal assistance required from pilot.

Similarly, the forex trader must be trained for many hours for many years in order to be able to completely exploit the benefits of forex auto trading.

Or else forex auto trading will hurt more than it can benefit the trader.

Forex traders who blindly purchase automated forex trading systems without proper forex education are on mere hope of getting rich over night. If making money was just as easy as buying couple automated forex trading systems then why would anyone has to go through years of schooling and then through college degree?

And with my five years of forex trading experience I can tell you that if you jump for automated forex trading systems without first getting proper forex education then that's a very tell-tale sign of immediate failure in forex trading.

Just think why would the Boeing 707 pilot needs to go through years of intensive training if she/he is eventually going to run it on autopilot?

If autopilot is going to do all the maigical stuff, I think Boeing can save big bucks just by recruiting someone with a sense to push the red-green button instead of a truly trained pilot, just my personal thoughts.

Maybe forex expert advisors (EAs) will make a trader some money but do not count on it to make the trader filthy rich though.

There are some times, some days, some weeks or even months, EAs will perform miraculously bringing the biggest bang for your buck.

But I have also witnessed there are other times too when forex expert advisors (EAs) will stink.

So be careful on those draw-down periods!

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NO, forex advisors will not make money if the trader is completely ignorant about forex market and most of all forex education.

If the trader buys forex advisors solely on great reviews with a purpose to merely hoard piles of cash next day, next week, next month, dodge this bullet -it's not going to happen.

Simply think your brain got fried because of the good copyright in the website.

There is no such forex trading robots that constantly yields high returns year after year without any human inputs.

If it did exist do you think big investment banks like Goldman Sachs, Bank of America or the richest investors like warren Buffet with plenty resources will ever let it out in the market for public access?

And do you think the creators of those automated forex trading systems will ever kill their goose that lays them golden eggs at all the time by selling them at pennies for you?
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But what about all the legitimate return on investment (RoI) claims that creators and preachers of forex trading robot make?

Those justifiable claims are all valid provided that the creators or the preachers are all seasoned traders themselves.

All I am saying is it takes years to master forex trading. Forex robot trading does not substitute forex education. Use it as an assistant but not as a substitute for your trading knowledge and experience in any event.

In my personal experience forex advisors can yield good RoI provided -

Forex traders have sound forex education

Forex traders understand forex money managemenet principle

Forex traders do not fool hardly depends on forex trading robots

Forex traders lay the ground work on what parameters will forex advisors run

Forex traders determine to deploy forex trading robot on a particular currency, on a particular time frame and particular size and lot

Forex traders never let automated forex trading systems rule out her/his conscious trading decision.