We know that there are some areas, in technical analysis, in which the price tends to bounce. These areas may be either supports or resistances. Let's try now to understand in which case the support and resistance are more reliable.
A point of support or resistance exists above all in the investors’ perception, because after a certain amount of time they get used to operate on the resistance or support point, helping to reinforce the area. Therefore it happens that the longer a point of support or resistance is maintained, the more it becomes stronger and when the price will pierce the limit, we will know that all investors used to operate according to that pattern will abandon that line causing the price to take a decisive direction.
In this case, acting on the support or resistance consolidated points can give excellent profits, especially if we consider that a possible overrun can push the trend in the taken direction. Anyway, we still have to wait for the passed point to become the opposite of what it was: a support has to become resistance and a resistance has to become a support. If this happens, we are almost certainly facing a trend reversal, so it is worthwhile following the trend. The support and resistance trading strategy is a widely used method in Forex trading, but it is important to match this particular strategy with the well-defined stop loss that must be respected.
Supports and resistances are formed on any period charts and reflect the inability of a certain price to move above (resistance) or below (support) a certain price level. We can considerate both static supports / resistances (unchanging over time) and dynamic ones (for example, moving averages or trend line).
For what concerns the static supports, a concrete example can be found in the recent trend of AUD / JPY. As we can see from the chart below, starting from mid-July onwards, the threshold of 79.52 (bottom of 25 July) has limited the downside of the cross on several occasions without ever breaking it down in the closure time. This support has therefore acquired the status of primary support and in the future may be exploited by traders opening short operations on AUD / JPY when the closure will be completed below this level; obviously it is essential to establish a stop loss on the intraday top of the session in which the technical breaking was completed.
Support and Resistance
Supports and resistances can be classified as dynamics. This feature can be acquired as a result of a trend line that combines primary bottoms and tops or due to the trend of moving averages that have proved particular reliability in containing prices. EUR / AUD offers us a very interesting example of how to operate. The exponential moving average at 20 days has been able to counteract any attempt of the cross between December 2011 and February 2012 to break upward.
Upward intraday breaks but never closing sessions above the dynamic resistance. Only on February 21st EUR / AUD closed above the moving average at 20 days providing the trader the right signal to go long. Considering that this signal is formalized together with the breaking of another dynamic resistance line, created by the neck line of the bullish head and shoulder, the strength of this signal was remarkable and left no doubts about the future evolution of EUR / AUD.
Trading Support and Resistance
A last consideration can be made on the capacity of transforming a support into a resistance and vice versa. The USD / MXN graph shows us how the violation of the supports of 13.045 on September the 7th 2012 has made become this level a primary resistance that the market has already approached several times but could not still overcome in the closure time.
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