By Fabiano Trevisiol
What are the key levels of support and resistance and how to use them
All technical analysis is based on the key levels. The two important concepts of technical analysis is based on the classic Dow Theory, which dates back to the early 1900, there were trends and key levels. The trend we will see in the next lesson. These concepts are fundamental to plan your forex strategy trading operation.
What are the key levels in the forex market?
Actually, not only in the forex market, but just any type of financial market key levels are areas of price acted as support or resistance.
Probably some of you are wondering what’s a support or resistance, I’ll tray to explain as simple as possible. The key levels are areas that have led to an a price reaction.Usually at the key levels the price it tends to bounce and take the opposite direction, sometimes Violently , the key levels are more important because when the price reaches them is likely to come back, even reversing the trend, or the general direction of the market. Which can be long (buy) or short (sell).
A key level is a support if the price is located above it and the level is then below, imagine that the level act virtually as a base of support for the price. On the opposite side if the level is above and the price below, we say that is resistance, imagine that act as a brake for the price to go any further .When the price penetrates a support, this automatically became resistance ,and vice versa when the price penetrates a resistance then it act as support, these penetrations are defined breakage, or breakout. After breaking normally expect that the price will continue its path to the next key level.
The importance of a level is greatest when looking at the graph it is evident that in the past the price as reacted ,stopped and rebounded, approaching the level.
Why are important the key levels?
In forex technical analysis in general, the key levels as we have said often result in a rebound in the price, for this reason they are also called “event areas”. Are important because it is precisely in these areas that correspond to the behaviour of the market become predictable. The trading technique that use mainly the break key level is the breakout strategy, this methodology takes advantage of pending orders at the passing of support and resistance. The price action instead is a methodology that use the formation of certain type of candlestick pattern or (more then candles with certain forms), in conjunction with the presence of a support or resistance in the vicinity, or rather close to the current price. In many cases, the price action also takes advantage of the wave-like movements of the price. The price when it moves it never does with a straight path, but with wave, these waves are called flags or retracements, price action uses these waves to buying at the bottom of the wave and selling at the top.
Now let’s see some example on the chart below.
See how millimetric it is? It seems incredible as the price, which for most of the time responds to logic entropic, in some cases respond perfectly to these level in an almost millimetric, mathematical, precise to perfection.
Another important thing that can help in the identification of these levels is that usually define those level that led to the rebound of the prices both above and below, although it is not a fixed rule, there are many exceptions.
Let’s take another example.
Here, too, is accurate like an a geometric shape, and it is also very clear that the price has rebounded to levels above and below, serving first as a support and then as resistance. This is gold, also known as XAU/USD, a CFD (contract for difference), one of the most technical that there are.
Before concluding, one last example.
In this example we see an important concept. When the price penetrates the level, and then go back, it is said that we are in the presence of a false breakout, or fakey when it happen commonly called the level was tasted. This behavior is important to be able to recognize an important advantage to take to the market, when in fact we are in the presence of these false breaks the price then goes for a ride in the opposite direction, usually to the next resistance or support, we see it at the circles, instead sometimes burst is violent and the price takes a direction determined, we see it at the arrow.
Well ! For today is all, I renew the appointment for the next lesson.