An Intern Learns – Support and Resistance Levels
It’s a new week and once again I’m getting stuck into some foreign exchange. Although trades stopped over the weekend, happenings around the world have continued to shape the currencies and it’s great to come back and see how things are all looking. When I last left you I had just begun trading for the first time. It was challenging and exciting and yielded some varying results! Using my demo account I traded the GBP/USD pair. I decided to stick with this pair for my trading as by staying with the same pair one can become more familiar with it’s general trends. I got stuck into some trades and made some profits and also a couple losses! As I mentioned in my last blog, those Stop Loss and Take Profit functions are really handy! By using them I was able to prevent heavy losses on a poor judgment. But it’s a new week and with new learning we can make an improvement on our trading.
I’ve decided to stick with one particular currency pair, the GBP/USD as this is considered a ‘major’ currency pair. Currency pairs are classified based on which two currencies are present. Any pair that has the USD in it is considered a major. As you know, the USD is a major force in currency trading and so is credited the major title. These pairs would include the likes of EUR/USD, GBP/USD, JPY/USD, CHF/USD, CAD/USD and AUD/USD. Any pairs that include one of these currencies but not the USD would be called a ‘cross’ pair. For example EUR/GBP or AUD/JPY. Once you and I get more experienced with trading it’s a good idea to diversify your trading and look into pairs such as the crosses, as these can often provide some great opportunities. If you want to really diversify your trades you can always get into the ‘exotics’. Now this may evoke images of tropical beaches and Piña colada’s but simply refers to trading in any other, slightly less commonly traded currency pairs. These could include JPY/ZAR – the Japanese Yen and the South African Rand or NOK/SEK – the Norwegian Krone and the Swedish Krone.
So I decided to stick to the GBP/USD and set up my chart to see how the pair was faring. I changed some settings to more suit my preferences. For example on the MahiFX platform, when I am looking at the ‘Analysis’ tab I chose my pair and adjusted the time setting and graph style. Straight away the chart adjusts to this view and I’m presented with two wiggily lines going across the chart from left to right. One wiggly line represents the buy price and the other represents the sell price. What I began to notice was that there were some distinct patterns emerging. Although the trend (in this case) is generally going in an upward direction, there were instances of falls and a visual of what looks like a cross section of a valley emerges.
After doing a little research on these patterns I learn that these are in fact areas of ‘resistance’ and ‘support.’ Turns out, we can use these areas as a means to help us predict where the market is going to go next. If we are looking at a rising trend – an area where the market rises and the tips down again, creating a peak, is called a resistance level. This may happen a few consecutive times. To give an analogy, what’s basically happening is the market is trying to rise but is hitting a glass ceiling of sorts and is being forced down. Next to these peaks are also troughs where the market tips down and hits the floor - this is called an area of support. This will continue to happen as the market moves forward. It’s important to note that the more the market hits a zone of resistance or support without breaking through it the stronger that zone is.
Now what this all means is that by looking at these patterns and identifying these zones of resistance and support, we can use it as a tool to speculate how the market will continue. For example, if we see three peaks on a chart of roughly the same size – this may indicate an area of resistance. We can speculate that the GBP has recently been faring well against the USD (say based on a news analysis) and that after this bout of resistance the market is likely to break through and continue to rise. If we speculated this correctly and placed an order we would have been able to make a profitable trade. The MahiFX platform has a great feature that can assist with this. In the new analysis view that has just been released, the live news that affected that market is viewable on the charts. Little grey triangles will appear along the bottom of the chart and when you move your cursor over it, the corresponding news feature will pop up. This short blurb can be seen in context of the market and how it has affected the trend.
In the next blog I will be focusing on a related topic – the different types of market analysis. In the mean time, happy trading!