Forex Blog

In this quick lesson we’ll go over the basic concept of setting up your charts to trade in a support and resistance market,  then make an analysis based on your chart; which leads into developing a trading plan. We’re only going to use basic tools, horizontal lines to mark the support and resistance points we find above and below price then add a few trend lines to help see the patterns unfolding. We’ll start with a Daily chart and move to the 1 hour timeframe to trade from since the 1 hour timeframe is the closest thing to a universal chart as we can get.

First the Daily chart. What we are looking for are the recent turning points in the market and we are going to mark these with a horizontal line. The lines above price (resistance) we’ll color code red since the points above price are where we look for the market to turn short from and become selling points. The lines below price we’ll color code blue since the points below price (support) are where we look to buy at. In (figure 1) I’ve marked the closest Daily chart turning points above and below price. These are the immediate support and resistance points to price, that have proven to be a support or resistance point in recent history.

Figure 1

Now as we add support and resistance points what we want to check is, has price reacted to this same point in recent history other that the original point the market turned from. Something to note is that the markets are not mechanical entities where everything is perfect to the pip, there are times where you’ll see it almost seem magical that price reacts to within a pip a level but I assure you it’s nothing magical. The reality of this is each level should be considered a range around the actual horizontal line. The basics to understanding this is that as market orders are placed not everyone will use the exact same price some will place their orders above it some below it in a range. Add to that, that as the market moves to one of these levels it has to absorb the order flow that comes into the market which can cause overshoots as well as coming up short of the level, simply because there are enough orders placed early to this level being tested it absorbs the orders and a bounce or a rejection occurs, thus the market reverses direction; if it cannot absorb the orders around the level it is broken and price continues to move. There are slight deviations of price and charts from broker to broker that have to be accounted for…the slop I call it.

Other things we want to look for are do these levels align with previous transitional points in the market. These are the points where the market actually breaks the low or high of a previous trading period and reverses direction. We at Trade Kings Club call them Logic points. We also like to see highs of candles matched up in history with candle lows, which we like to call pivotal points. In figure 2 I’ve marked some of these points to our first 2 levels.

Let’s do a quick analysis of the Euro and see what we come up with. It’s obvious the Euro has been trending down ever since the overall high of 1.6038 making an incredible drop to 1.2329, that’s a 23% devaluation in roughly 4 months.

Using Fibonacci and measuring this incredible drop in price we get our retracement points to this move. Looking at how price has reacted to these levels we can see defined support and resistance created at or around these levels. In the example below (Figure 1) we have the Euro weekly and the downtrend measured. Highlighted you’ll see the points that the market has retraced to and each time was successively lower each time, most lately retesting the 38.2 Level or the (Short) level. I say the short level but the market can retrace to the 61.8 level and still remain a short market, its just if price can be maintained below these levels it remains in a short condition. In order for the downside pressure to be relived the market will have to break the 61.8% level and be maintained above that and well see a Long market once again.

Figure 1

Now if we take this one step further and we measure the amount of price that has retraced into this downtrend, we will get the support points. If these support points (from the amount of retracement we get) show support and price bounces from them, we know that price will make another attempt to break the downward momentum and try to break that Downtrend Long level. In (Figure 2) we now measure the retracement to find out if an attempt to break Long will be underway what we find is support fails and the downtrend will continue. This is telling us the Downtrend is still prevailing.

Live trade example using support and resistance to scalp a quick profit out of the market..

Yesterday brought to a close another good week for the Forex Trade Kings Club and myself. We have enjoyed 5 weeks now with our weekly targets being met and we expect this to continue. The more volatility there is in the markets the more we like it. This past week the Euro has fell to test the previous support left by natural support and resistance points. Initially this point has held in the 1.3300 range a second test here and we could see a failure this next time around. Looking at this movement of the Euro over the past week since the initial test of 1.3300 (figure 1) and the events that unfolded from that point. 

It was a very volatile week where we saw the Euro climb continue its upward press to the tune of 1290 pips only to top out and then fall 895 pips; all inside of 1 week! It's not very many times where you will see the Euro outpace the GBP in range. GBP made an early run in the week climbing a little over 800 pips, only to later lose all the ground gained by falling 910 pips. Those of you who have been trading for a few years may remember the Euro being good for 70-100 pips on a good volatile day; now we're getting that much in a 1 hour candle. This just goes to show you the changes in the market conditions you’ll have to face and be able to adjust to in your trading career.