CLASH OF GIANTS
Today’s Forex article is geared towards explaining the battle of 2 worlds. Independent of the time frame, Forex traders will regularly witness a trend which will sooner or later “run into” bigger (higher timeframe) support or resistance level(s).
Eventually one of the two is going to win:
a) Either the trend will be strong enough to push through the support or resistance (S&R).
b) The trend fails and the support or resistance holds and is too strong to break.
c) The trend stalls and price enters into a consolidation zone in front of the S&R. The zone could stretch itself and become a bigger zone, but eventually, a breakout to one side or another will occur.
Let’s analyze both trends and S&R before moving on….
WHY ARE TRENDS IMPORTANT?
No matter whether you trade ranges, reversal or trend continuations, you still need to have a measurement how to identify the correct environment. That way you know when to trade the matching strategy.
In our trading room, we trade only with the trend and we use to support and resistance as a filter (the next paragraph will explain why). In general, trends are profitable pieces of price movement but they occur less often and Forex traders need to know when to trade them and when to be cautious because consolidation zones can eat up a lot of that profitability during trends.
WHY IS SUPPORT AND RESISTANCE IMPORTANT?
A support and resistance are important in all types of markets (reversal, trend, range). An important Support and Resistance level is very important for the market because it creates a level which a part of the market has identified and is monitoring.
When price approaches and/or reaches an S&R, then there is decent to the high probability that price will “respect” that level.
a) How high is the percentage that S&R will gain respect? This is impossible to calculate as there are too many occurrences, but definitely high enough that everyone wants to consider some of them in their trading plan.
b) What does respect mean? It means that the likelihood of price not reaching to the S&R by at least pausing, retracing or reversing a bit is unlikely.
c) Are some S&R strong than others?
Yes, the higher the time frame, the more important the S&R. A daily Fibonacci level is certainly a level that all Forex traders would want to watch out for; the same holds true for a weekly top or bottom.
Yes, support in an uptrend and resistance in a downtrend tend to be stronger in most cases, with the exception of massive levels that have the ability to alter and stop trends.
Let’s continue and tie this 2 (trend and S&R) together….
PATH OF LEAST OPPOSITION / RESISTANCE
Price will most likely stop at an S&R level because a bigger part of the market sees, realizes and anticipates this level to be of importance.
Always remember that price choice the path of least opposition or resistance. This is a vital realization for every Forex trader. Once this fully sinks, no Forex trader will ever skip the importance of S&R in their trading plan, neither in the implementation of the plan. It will impact one’s view of the market and thereby one’s trading plan.
The path of least opposition or path of least resistance means that price will choose a path (up or down, and future subsequent ups and downs) that has the least opposition /resistance each step of the way. Price movement shows the path of the least resistance in the past and it will show it in the future. Various elements shape and influence this path but this goes beyond our current focus.
All Forex traders realize that S&R has a major impact on the potential path. So if the price is close to an important level – with unexpected events and news as exceptions – there is a high probability chance that price will be unable to break through that level immediately (although eventually, it could after some struggle).
BOUNCE OR BREAK SPOTS
In Forex trading, Forex traders must know where the S&R are located because that is where they know that price can stall or even stop. Or in other words, these are the “talking spots”, “decision moments”, take profits, or filters. These levels are “lines in the sand”.
In general, S&R can cause price and trends to either:
1) Reverse and trend in other direction
2) Reverse and consolidate
3) Bigger retracement
5) Small retracement
With points 4 and 5 a trend continuation eventually is likely. In that case, the price will be able to break through the S&R. With Point 3 the same could happen but it will take longer to develop. Point 4 and 5 the S&R stopped price in its continuation.
These support and resistance levels are key levels for identifying bounce or break spots and both concepts can be traded. Read more here:
KEEP TRADING SIMPLE
When a Forex trader understands that trends are the juiciest part to trade but these trends have roadblocks along the way that sometimes prove too tough to break (S&R), then the understanding and implementation of this “clash of the giants” will never ever be ignored anymore.
Forex traders always want to set up clearly defined levels, such s S&R, where they (can) execute their trading plan. Here is why:
1) This helps avoid over analysis, helps avoid emotional decisions and decreases irrational fears.
2) Forex traders can create clear plans for a specific bounce or break spots.
3) By doing so, they let price guide them and not the other way around (where traders are thinking what can happen)….
4) Remember, Forex traders want to set up themselves for best reaction to the market, and not cling on to hope that the market will react to their thoughts and visions.
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