Support and resistance

Another way to estimate true supply and demand is to look at support and resistance lines. We can say that fresh demand appears at support and new supply appears at resistance. The problem with support and resistance in forex is that these lines get broken all the time and you are continually re drawing them. It’s hard not to suspect sometimes that some participants are targeting support and resistance lines, especially on shorter time frame charts such as 15 and 60 minutes.

Then there is horizontal support and resistance, recently more popular than the sloping variety of support and resistance that connects a series of highs and lows. Horizontal support is a throwback to the “Darvas Box.” Darvas was a successful trader in the 50s and 60s who observed that prices move in a series of sideways blocks, and once the top or bottom of a block is breached, you can expect a new high or low. shows such a series (blue horizontal lines).

A related concept is the pivot point, which draws a line through the median price. The median price is the high plus the low plus the close divided by three. When the close is under the median price, sellers offered a lot of supply that day. When the close is over the median price, demand was higher than supply. If you take a moving average of the median price and consistently buy when the close is over the median and sell when it’s below the median, you have a moving average trading system that is more sensitive than the usual moving average using only the close. It shows the median price (green line) and the five-day moving average of the median price (red line). Note that the close on the fateful billion-dollar supply day was higher than the median price.

All this makes it more understandable why some traders try to force the high or the low or the close to particular levels. Some traders draw pivot-point charts with a horizontal support and resistance channel off each day’s pivot point. Then they wait for a breach of the channel line. Breakouts of the channel are especially valuable at high and low points. It shows a pivot point channel in green drawn from the day of the latest lowest low, which happens to be the day before the billion-dollar day. The channel is constructed by taking the median value and multiplying by two, and then subtracting the low (for resistance) and the high (for support). In this instance, the channel is bounded by support at 1.1870 and resistance at 1.1930. Note that the channel limits are not the same as a recent lowest low or a recent highest high, as in the Darvas box example or as cited by many traders. You may get a burst of buying or selling when the previous lowest low or previous highest high is breached, but the original impulse for the trade often comes from a breach of the less-obvious pivot point channel.