Technical analysis Support and Resistance in forex factory

When prices have been rising and then reverse downward, the highest point in the rise, the peak, is referred to as a “resistance level.” It is the level at which sellers may be as powerful and aggressive as buyers and stop the advance. When the sellers (supply) become more powerful and aggressive than the buyers (demand), the result is a subsequent price decline from the peak.

A resistance level becomes a resistance zone when more than one resistance level occurs at roughly the same price. Prices rarely rise and stop at exactly the same level. A single, high-volume price peak often defines a resistance level, but even then, because the high volume, especially if preceded by a sharp price rise, is a sign of speculation and emotion, the price where large sellers actually began to enter the market is not clear.

A “support level” is the opposite of a resistance level in that it is a single trough. At the support level, buyers become as powerful or aggressive as sellers and stop a price decline. The concept of support and resistance presumes that in the future, prices will also stop at these recorded levels or zones, and that they represent a remembered psychological barrier for prices.

The zones will carry through time and become barriers to future price action. Not only will the zones carry through time, but also once they are broken through, they will switch functions: Previous support will become resistance, and previous resistance will become support.

Identification and Psychology behind Support and Resistance “Have you ever bought a stock, watched it decline in price, and yearned to sell out for what you paid for it? Have you ever sold a stock, watched it go up after you had sold it, and wished you had the opportunity to buy it again? Well, you are not alone. These are common human reactions, and they show up on the stock charts by creating support and resistance.” —Jiler (1962)

                    EXAMPLE OF SUPPORT RESISTANCE                      

Let us look at the presumed psychology behind a support level and see why it might carry into the future. There is little question that a price trough is a point where buyers overwhelmed sellers.

In Figure USDJPY you can easily see the price becomes a support level as well as Resistance area.

Notice that none of these players is using a fundamental or other informational reason for buying the currency at support level. The reasons are purely psychological, but they are strong reasons by themselves. The presumption for technical analysts is that buy at  support zone and sell at resistance zone, the stronger and more important that zone will likely be in the future.

A resistance zone will likely now also exist similar reasons because sellers at that price wish to sell: Support and resistance zones, therefore, are price levels where supply and demand reaches equilibrium for unusual but persistent psychological reasons.

Continuing ………………… see next part  Support & Resistance Zone

Happy Trading.