Using Support and Resistance explained by professional Forex trading experts the “Using Support and Resistance” FX trading team.
Using Support and Resistance
In our article, The Forces of Supply and Demand, we saw what a large impact these forces can have on prices in the Forex market. This is a strong and important relationship it may be difficult to understand exactly ‘how’ this takes place.
This is where support and resistance can come into play; helping traders identify levels in which the supply and/or demand in a given currency pair may change once that line is crossed.
This article will delve deeper into this premise, and we’ll look at how traders can begin to use supply and demand to their advantage.
Supply and Demand
Supply is the amount available at a particular price, while demand is the amount that is wanted or desired at a specific price.
As we saw in The Forces of Supply and Demand, the price of a product (or instrument) can have a huge impact on the amount that is demanded from the marketplace, or the amount of supply that might be available.
As prices increase, seller’s willingness to get rid of their products will also increase. This is called a supply curve, and it illustrates how additional units become available (on the vertical axis) as prices increase (horizontal axis). Supply and Demand in the Real World
Let’s imagine, for a moment, that you have been tasked with the job of purchasing groceries for your family. And as most families, a top-line item on that grocery list is steak for weekend grilling.
You go to the market one day, and notice that the price on steak has doubled! It’s now going to cost twice as much to pursue your weekend grill-master activities, and you quickly begin to think how valuable that steak might be. You begin to look for alternatives, such as hamburger or chicken; replacement products with which you can derive similar value; albeit at a far more comfortable cost.
While you, individually, may decide to pay the doubled price of steak – we have to think of the market dynamics at work. Not EVERY steak buyer would be interested in doing this, and many would opt for replacement products.
This is a living example of a demand curve. As price increased, demand decreased.
But, let’s say the next week you go to the grocery store, you notice a different phenomenon. Now, instead of steak being twice what your used to paying – it’s half of what your used to paying, or 75% off of last week’s price.
Now you begin thinking in a different direction than you had last week.
You start to think that having steak during the week, on top of your weekend grilling festivities, can bring some additional enjoyment to yours and your families lives.
You remember how much your wife loved that steak salad the last time you took the family out for dinner, and you decide to load up while price is cheap.
But while you’re pontificating the wonders of steak in the grocery store, you witness a rush of people running with baskets full of steak. Customers are loading up while price is cheap, and you realize that if you don’t act fast all of the discounted meat will be gone before you know it!
This is, once again, demand at work. And as price has moved lower, we’ve seen how demand increased; not only for you, but the market in general.
Supply and Demand Playing Out through Support and Resistance
The example of discounted steak isn’t all that different than what we can see on a currency chart. Let’s take ‘The Cable,’ for example (GBPUSD).
Since July of 2010, we have not seen price below 1.5230. There have been multiple instances in which price has approached this level – but as of yet, this line in the sand has not been broken.
Using Support and Resistance Conclusion
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