Determine on How to Find Support and Resistance in Forex
January 30th, 2009
Accurately Identifying Support And Resistance In The Forex Market
Support and resistance are two of the most important elements to successfully trading the forex market. The fact is currency pairs often gravitate to very specific levels in the forex market. These levels are known as support and resistance, both of which can help you determine when to enter new trades and even exit existing positions.
Currency pairs trade to specific levels for many reasons. Businesses, such as importers and exporters, use the currency market to hedge risks. They will often buy and sell currency pairs at specific price levels in order to lock in their risk management.
Speculators, such as individual forex traders, hedge funds, and commercial banks, try to pinpoint the natural levels to which currency pairs often trade. Even central banks, especially those who often intervene in the forex market, will buy and sell at specific levels.
The key is to accurately identify where these levels are and how to determine if they are broken. The breaking of support or resistance is what triggers a trade, so naturally an accurate reading on these levels is extremely important.
There are many different techniques for determining support and resistance levels. Some of the more popular in the forex market include pivot points, ranging from hourly to monthly, and Fibonacci analysis. I’m a big fan of pivot points because they are precise: there’s no subjectivity involved when calculating pivot points. Fibonacci analysis, on the other hand, is extremely subjective. The problem with basing your support and resistance on the Fibonacci sequence is determining where to start and stop the retracement levels. No one has a good answer for this, and every trader seems to use a different method, so it ends up being a very subjective technique.
One of the best, and by far most accurate, ways to determine support and resistance levels in the forex market is by using point and figure charts. These charts are constructed with a set of rules, using X’s and O’s to draw the charts. Unlike traditional bar or candlestick charts, point and figure charts are very precise in defining specific levels.
The trouble with bar and candlestick charts is that you have to use some subjectivity when drawing your support and resistance levels. The biggest problem stems with these charts is in knowing when a support or resistance level is broken. Traders run into trouble when a currency pair moves slightly above or below a specific level and are left wondering whether or not this level was broken.
Point and figure charts provide a solution to the subjectivity that often clouds bar and candlestick charts. Point and figure charts accurately define support and resistance levels with a rules-based approach to constructing the charts. It doesn’t matter if you’re trading very short-term or very long-term charts, the rules are same.
Visit http://www.fxpnf.com to learn how to accurately identify support and resistance levels in the forex market using point and figure charts.
Article Source: http://EzineArticles.com/?expert=Eric_Stout
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