Mapping Price Action

The purpose of this chatper is to explain the first steps in conducting technical analysis
of forex prices. These steps involve finding support and resistance, trend lines,
and assessing where the price is in relationship to these geometric points.
PROJECTING HORIZONTAL SUPPORT AND
RESISTANCE POINTS
Where is the currency pair price and what is it doing? This question is quite basic but
it involves many levels of analysis. Understanding the location of the currency pair is a
foundational beginning of technical analysis and will reveal a great deal of information
that a trader can use in formulating trading strategy.
But how do we know where to look? The basic technical measurement of horizontal
support and resistance provides the ground floor of technical analysis. Whenever you
look at a currency pair, you have to ask where support is and where resistance is. The
answers provide the first mapping of the market.
Support is where the price stops falling, and resistance is where it stops rising. The
process for locating support and resistance is fairly straightforward. Figure 10.1 includes
several support and resistance lines. Those lines that form floors and ceilings are outer
support and resistance containing the price action within a range. Those lines that are
inside these larger lines are inner support and resistance.
What is most significant about horizontal support and resistance lines is that they are
not lagging. In contrast to indicators, they are projections and form psychological hurdle zones. When price establishes support or resistance, the market recognizes that location
as a zone or hurdle that has to be overcome. The immediate future price movements
need to probe and penetrate a support or resistance line. One of the first principles of
trading forex is to locate a trade near support or resistance.
Once we know where horizontal support and resistance are, we need to also determine
the strength of that support and resistance. There are different ways of forming an
opinion about the level of strength in the S/R lines. In Figure 10.1, we can see that the
1.2500 level offers strong support because over six months that price point was unable
to be broken down and the euro–U.S. dollar (EURUSD) held above it. In contrast, the
resistance levels show only one test of the previous high. The trader can conclude that
there is greater strength on the support side at 1.25. If the price moved toward the previous
high (1.3367 on December 31) and failed to go through it, confidence that resistance
was stronger at that level would increase. The time interval on a chart also can be used
to weight one’s confidence about how strong the S/R levels are. The longer time frames such as monthly and weekly resistance and support are more robust. After all, a great
deal of money has had the chance to go through those levels but did not.
In constructing support and resistance lines, the trader needs to realize that there is
a degree of judgment. In Figure 10.2, the support and resistance lines are drawn where
there appears to be a set of highs and lows. Some of the candlewicks are penetrating the
lines. Those penetrations would be viewed as creating temporary levels of new support
and resistance, with the stronger levels being those connecting more points. Drawing
support and resistance lines need to be done with the perspective that these are zones
and not exact lines.




By ABE COFNAS