Tuesday, September 23, 2008

How to Accurately Identify Resistance and Support within the Forex Market

Within the forex market, resistance and support are two elements that are very important to each forex trader’s ability to successfully trade. In all actuality, the fact of the matter is that currency pairs sometimes gravitate to some very specific levels within the foreign exchange market. All of these levels are referred to as the resistance and support, both of these levels can help each forex trader to determine when he or she should enter into new trades and when to exit the exiting positions.

There are several different reasons that pairs of currency’s trade to certain levels. Businesses, like exporters and importers, make use of the currency market in order to hedge risks. Often, they will purchase and sell pairs of currencies at certain price levels in an effort to lock in all of their risk management.

On the other hand, the speculators like hedge funds, individual forex traders and the commercial banks, all try their best to pinpoint all of the natural levels in to which all of the currency pairs normally trade. Even the central banks, specifically those that often intervene in the foreign exchange market, will purchase and sell the currency pairs at certain levels.

As a forex trader, you should know that the key is to be able to accurately identify where all of these levels are and possessing the knowledge that is required to determine if these levels are broken. A trade is triggered by the breaking of the resistance and support level, so naturally having an accurate reading pertaining to all of these levels is highly important.

As a forex trader, there are several different techniques that can be used for determining the resistance and support levels. Among the techniques that are most popular within the foreign exchange market includes the pivot points, which range from monthly to hourly as well as the Fibonacci analysis. Many forex traders are a big fan of the pivot points because pivot points are considered to be more precise whereas, the Fibonacci analysis is considered to be extremely subjective.

The main concern with basing your resistance and support solely on the Fibonacci analysis is the ability to determine where you should start and stop all of the retracement levels. There isn’t anyone that has a very good answer to this, and each and every forex trader appears to use a totally different method, so it normally ends up being an extremely subjective technique.

Among the best and most accurate ways that are used in order to determine the resistance and support levels within the foreign exchange market is the use of figure and point charts. All of f these types of charts are constructed so that they have a certain set of rules that uses O’s and X’s in order to draw out the charts. Unlike the candlestick charts or the traditional charts, the figure and point charts are considered to be extremely precise when it comes to defining a specific level.

However, the trouble with the candlestick and bar charts is that you are going to have to use some type of subjectivity when you are drawing out all of your resistance and support levels.

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