Learn FOREX: How to interpret Support and Resistance levels

When you reach a certain level of understanding about how the FOREX market works, you become conscious of the huge significance support and resistance levels have.

Although the internet is populated with a large collection of strategies and rules on this subject, I always found it difficult to understand what lies beneath and how to reliably pinpoint the exact inflexion level on a chart.

This article addresses the subject in my unique and well-known style. I will share with you my findings as well as the optimum approach to them, trying to extract the essential and propose a simple, yet effective way to show a constant profit.

The S/R levels are the product of the battle between the sellers and buyers, on their perpetual attempt to turn a profit from their market expectations.

This is always dictated by the big players and smaller hands only come to add momentum to any change in direction.

This observation becomes more significant for larger time frames on the chart, given the colossal size of this market (more than 1.5 trillion USD a day).

That is why all technical analysts advise you to wait for the change in direction to occur, and avoid initiating positions in the anticipation of a support or resistance level. This is precisely because no one knows if the big guys are still willing to defend that level.

Of course, they will pack their analysis in vibrant colours and fashionable expressions, but the naked truth is the above-mentioned one.

The advent of so-called digital options brought major players at the table. These are the casino-style bets, using terms like one touch barrier, double no touch barrier and similar others. Simply put, you bet that if the rate behaves in a certain fashion, over a specified time frame, you will be paid a certain amount of money, in line with odds similar with horse race betting. For instance, you can bet that EUR/USD, currently trading at 1.2300, will not go above 1.2400 for the next seven trading days. If this scenario plays out well for you, the broker pays you in line with the odds of the bet.

This digital options, together with their classic options relatives, are a major supplier of S/R levels in the FOREX market, as players select very specific levels for their bets.

As it is the case with all humans, we tend to simplify things, this approach resulting in round numbers for our bets. It is unlikely that we will go for a 1.2328 level and more likely that 1.2350 or 1.2300 will be our choice.

This mechanism initiates the structure of rather predictable S/R levels on any FOREX chart and the most important ones are the clear, full, round numbers as 1.2000, 1.2100 or 1.2200, if we are to take EUR/USD pair as an example.

While I accept that there is more to it than this presentation, a good grasp of these two concepts, the big players and round numbers, will greatly improve any trading activity.

In the process, do not forget that news and economic calendar can play important roles in the formation of S/R levels and they tend to be fiercely defended by the important trading operators.

A word about Trend Lines is appropriate here.

Trend lines are a result of the formation of S/R levels and not a way to form them, even if the quasi totality of analysts is presenting them as a method of prediction. They are a great help for the big boys, as they easily show where the vast majority of traders will place their orders. I tend to give them a secondary importance, compared with the round numbers and news related inflexions.

Mr. VASILE is the founder and President of VORTEX Capital Management, a seasoned FOREX trader, member of the Securities & Investment Institute in London and author of the revolutionary SyncronDec training program used in his professional FOREX course. He is also the owner of http://www.forex-arena.com, a professional website, dedicated to FOREX analysis and education.

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