Simultaneous Release at www.thegeekknows.com
Once in a while, i get questions asking me why was a support respected when it was 1.4718 instead of 1,4719.
I would like to address this common misconception today.
Firstly, what are resistance and support lines?
When viewed on the chart, these are areas whereby the price seems to bounce off.
From a market point of view, these are areas whereby traders feel that enough is enough. ” I will not buy more at this price as it is too costly” ( Resistance Line ) or “I will not sell any further as this is too cheap” ( Support line )
For example, we note a support line at 1.4719.
However, there may be folks who are more stringent and will not sell lower than 1.4725 or perhaps we have folks who are easy going and are willing to sell as low as 1.4715.
This effectively “spreads” out the effect of the line.
This can be one of the reasons why we usually see the price slow down and consolidates when approaching an area of support or resistance as various expectations are being filled.
Another point i would like you to note is that forex being a decentralized market, will usually not have a standard price across all brokers.
If you whip up two charts from different brokers, you will probably see a difference of a few pips.
This contributes to the concepts of resistance and support lines being areas rather than a single line as what may look like 1.4719 to you, maybe 1.4721 to another.
Lets refer to the chart above. It shows the EUR/USD bouncing of a resistance at 1.4951 and later a support at 1.4910.
Notice that the price did push beyond the lines on a few occasions.
Therefore, it may not be feasible if one sets stop loses right on the line as the above example would have triggered your stop loss, just to turn back in your favor moments later.
That’s all for now and i hope i have shed light on how resistance and support lines work.
Read more Forex Articles and Views by The Koala at www.thegeekknows.com