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SUPPORT AND RESISTANCE LEVELS

 

What are support and resistance levels?

 

Currency pair prices (exchange rates) don’t always change without limits. In fact, certain boundaries start to appear for a given time interval. The upper boundary above which the price does not typically increase is known as the “resistance level”. The lower boundary below which the price will typically not sink is known as the “support” level. For a different time interval, these two boundaries may of course change.

 

What do they tell you?

 

Support and resistance levels tend to become stronger the more a price approaches these levels, without breaking through. When a price does finally break through, which will happen sooner or later, then the level concerned changes its role: for example, if the price increases finally enough to break through the resistance level, then a new resistance level will be established above that and the previous resistance becomes the new support level. The same thing happens (inversely) if the price decreases to break through the support level.

 

How does this impact a “ranging market”?

 

When the price of a currency pair increases and decreases between an overall higher level (resistance) and an overall lower level (support), this is known as a ranging market. While there are typically always opportunities to make profit as the price changes between these two limits, it is also interesting to know whether or not the price will “break out”. By understanding how support and resistance levels work, traders can plan their trades according to the probabilities that the price will or will not change outside of these two limits.

 

What are the other “trending markets”?

 

A ranging market as defined above is just one case. It’s a flat or “treading” trend. However, if the overall upper and lower limits do not apply or if they are constantly changing, then there are two other cases that are possible:

 

  • A “Bull” market where the trend overall is upwards, each high point being higher than the preceding one

  • A “Bear” market where the overall trend is downwards, each low being lower than the preceding one