Supports and resistance levels as collective memory
By looking at any forex instrument we can find supports and resistance levels present on any time frame and any currency pair. They are vital part of technical analysis and extremely profitable tool for trader who takes his time to get to know them and learn how to use them.
But what supports and resistances truly are and why do they exist on the market.
To simplify it, S/R are collective memory of the price movement, represented on the chart. Forex traders (even the best) have emotions. Pain (from loss) and pleasure (from profit). As Tony Robbins explains, those are two most important driving forces in human behaviour. We avoid pain and seek pleasure (happiness).
Traders are feeling emotional at support/resistance zones.
Support and resistance zones, comes in all shapes and sizes. Yellow - minor horizontal channel. Blue - sloping trend channel. Orange - major support. Orange circles: Pullbpack formations, tests of previously broken supports/resistance.
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Loosing trader. Determined to exit trade on nearest correction (closer to his entry). He feels pain and will most likely exit position on nearest S/R.
Trader that is not in the market. Pain from losing opportunity. He will look to enter on nearest correction. Waiting for price to return closer to that price level, at which he missed opportunity to enter for the first time.
Winning trader. He feels pleasure and happiness. He will possibly look to add to his position once another opportunity presents itself. Such as correction creating Support/Resistance, better price to enter in major trend direction.
Bulls will look to exit losing position on break even, once the price rallies to test broken price level.
Bears will already be in profitable position. They might wait for same correction to enter short, after they have missed the first entry.
Bears will look to exit losing position on break even, once the price declines to test broken price level.
Bulls will already be in profitable position, or they might wait for same correction to enter long after they missed first entry.
Supports and resistance exist on the market because traders experienced pain and pleasure on that price level. Therefore, there is intensive memory of price movement. More intensive the memory more important the Support/Resistance zone !