Levels of support and resistance – these are some of basic elements of the Forex technical analysis, in accordance with axioms of which
1. From the current price of currency couple there are always levels of
À) resistance – higher than currant price
B) support – lower than currant price
2. Penetration of the level shall mean a jump to the next level of resistance/support
3. Failure to penetrate (or false penetration) of the level causes kickback opposite direction (from resistance to support)

Thus, knowing levels of resistance / support and criteria of the true and false penetration, a trader can accurately open deals, operating from one level of resistance / support to the next level

On the diagram below, you can see illustration of the above thesis

Flat – penetration of resistance level upwards or support level downwards

Bidding at GBP/USD on 31.01.2006 – penetration of resistance level and commencement of the bullish session trend.

Simple?
At first, it may seem so, but if we take into consideration the fact that more than 95% of traders lose their deposits at Forex, then some reasonable questions appear
1. How millions of traders all over the world can be confused with this simple principle, as it may seem first?
2. How is it possible to define correctly levels of resistance / support, which are the basis for CONSISTENT rapid movement of currency?
3. What criteria distinguish true level of penetration from the false one?

Conclusion is as following – a trader will never be able to earn money regularly at the Forex market without having clear answers to the above 3 simple questions.

Classic literature about levels of resistance and support

Analysis of classic literature on levels of resistance and support explains reasons why 95% of traders lose their deposits. The thing is that different “classics” of technical analysis:
À) have quite different understanding of technical levels as levels of support / resistance.
B) do not have clear criteria for finding levels of resistance and support (except for technique of T. Demark)
C) do not have clear correlation between levels of resistance and support at different timeframes

For example,

1. Quite a few authors understand levels of support / resistance as HORIZONTAL lines, drawn by maximum and minimum prices

à) for Alexander Elder (se “Basics of exchange trade”)

Support/resistance “are shown on the diagram as horizontal or almost horizontal lines”, connecting several minimums (maximums).

Diagram 2. Support and resistance





Also, John J. Murphy (technical analysis of futures markets) indicates on the diagram below that, “points 2 and 4 correspond to support levels with the ascending tendency. Ascending of support and resistance levels with the ascending tendency is indicated on the diagram. Points 2 and 4 – those are levels of support, normally they coincide with levels of previous slowdowns. Points 1 and 3 – those are levels of resistance, which normally coincide with previous peaks”.



Diagram 4.36 Levels of support and resistance with the descending tendency.








2. Quite a few authors understand levels of support / resistance as INCLINED lines, drawn by maximum and minimum prices (i.e. trend lines)




à) Thomas Demark





Diagram 1.4 (c) Supporting price points of proposal (TD-points of proposal) form level of resistance. They are characterized by the fact that price values in those points were not exceeded during two nearby days. Those price TD-points are highlighted on the diagram.





Diagram 1.14 Price movements above TD-line of the À-Â demand repeat in mirror reflection after breakthrough of this line downwards. Price projection Z appears as follows:
they define difference between a price in point Y — maximum price above TD-lines — and a price in special point Õ on TD-line right under it, after that the resulted value is deducted from the price of breakthrough lower TD-line of demand À-Â.


B) inclined lines as support / resistance are used by L. Borselino see “Daytrading manual”
 )




.
L. Borselino: “As you can see on these examples, trend lines, based on the previous maximums and minimums, outline support or resistance in future”.




3. Combined application of inclined and horizontal levels of resistance / support by Eric Niman (“Small encyclopedia of trader”)

“Resistance line connects important maximums (tops, peaks) of the market”. In addition, a little further “it is better to draw resistance and support lines through zones of prices accumulation, but not through their maximum emissions at the tops and bottoms” (???)

Trend lines by minimum prices ("lines support" - Support)




Example of using levels of resistance / support at the trading terminal by Eric Niman



4. Levels of resistance / support, built based on moving averages or indicators, based on ÌÀ.

Eric Niman
Bollinger Band (ÂÂ) – “these are peculiar lines of support and support”


On diagram 2.26



5. “Round figures” as levels of resistance / support

Edwin Lefevre in his book “Reminiscences of stock exchange operator” noted “… when quotations first cross borders in 100, 200 or 300 items, after that they will obligatory jump upwards for another thirty or fifty items”

D. Schwager: “Be careful with extra accuracy in selection of dollar stops. If $781.25 works best of all for the treasury obligating document and $425 works best of all for the soybeans, than this challenges temptation to find “optimal” stop for each market. It would be much better to find round figure with which you feel yourself comfortable and to use one and the same dollar stop at all the markets”.


6. Classification of “weak and strong” levels of resistance / support from the point of view of “classics” of Forex.

John Murphy subdivides levels of resistance / support ("technical analysis of futures markets" (Publisher New York Institute of Finance and Prentice Hall, 1986)

à) Based on time, within which the prices were in this area, based on scope of trading and depending on how long ago that area has appeared. The more time the prices were fluctuating in the area of support or resistance, the more valuable that area is. For example, if in a certain stagnation area the prices were fluctuating upwards-downwards during three weeks, and after that they went upwards, then this area of support will be more valuable as comparing with situation when the similar price fluctuations would take place only three days.

b) Based on volume
Volume is another method for evaluation of significance of support or resistance. If formation of support level was accompanied by significant scope of trade shall mean that a big number of contracts were passed from one person to another, and subsequently a significance of support level is very high; and vice-versa, the less volume of trade was – the less significance of support level is.

c) The third importance factor of support level or resistance – is its remoteness in time from the real moment. As far as we deal with traders’ reaction on fluctuation of the market and onto positions, which they either have occupied already, or have not managed to occupy yet, then it is quite clear that the closer the event and reaction to it are in time – the more important the event is.

Alexander Elder in 7 years (1993) has repeated 2 of 3 main provisions by John Murphy (1986)
À. Elder distinguishes levels of resistance / support by
• Number of touches, which it sustained, the more touches – the stringer it is. During 2 weeks of trading the nearest support and resistance form, in two months people start to use to the and support or resistance become of average strength, and within two years the actual standard forms, which provides for a very powerful support and resistance.
• The bigger range of prices within the resistance and support area, the more powerful it is. Congestion with a big range of price turning point is similar to a big fence around valuable property. Congestion zone equals to 1 per cent of current prices level (4 items at
S&P 500 at level of 400) gives only insignificant support or resistance. Prices area that equals to 3 per cent provides for average support or resistance, and the prices area that equals to 7 per cent or more, can stop a very strong trend.
• The higher volume of deals within the support or resistance zone – the stronger it is. A big volume within the congestion zone indicates involvement of many players and speaks about big emotions. Small volume means that the players do not care that they cross this level and is a sign of weakness of support or resistance

Weak support and resistance make trend to slowdown and strong – reverse. Players buy at support prices level and sell at resistance prices level, making their impact a self-justifying forecast.




7. Through which points, levels of resistance / support shall be drawn from the point of view of “classics” of Forex?

À) Thomas Demark recommends to draw
* levels of resistance through support points of proposal (TD-points of proposal)
* levels of support through support points of demand (TD-points demand)


J. Schwager in his book “technical analysis. Full course” recommends to draw levels of resistance / support “CLOSE (???) to past minimums and maximums»

“Support and resistance should be considered as approximate areas, but nor precise levels. It is ought to highlight that the last maximum does not mean that the subsequent rises of prices will dry out at that level or under it, but it rather indicates that resistance can be predicted close to that level. Likewise, the past minimum does not mean that the subsequent rollbacks will finish at or above that level, but rather indicates that the support can be predicted in general close to that level»

Diagram 5.16.
ZONE OF SUPPORT THAT CAN BE DETERMINED BY CONCENTRATION OF THE PREVIOUS RELATIVE MINIMUMS AND MAXIMUMS: GOLD, THE NEAREST FUTURES CONTRACTS



J. Schwager: “Some technical analysts consider the previous maximums and minimums as points assuming sacred significance. If the previous maximum equaled to 1078, then they consider 1078 as a level of powerful resistance, and when the market goes up, let us say up to 1085, they believe that the resistance was broken. This is not true. Support and resistance should be considered as approximate areas, but not as precise levels.

John Murphy draws levels of support and resistance through the local PEAKS (minimums and maximums). “Normally, (???) level of resistance coincides with the level of previous peak”.

Diagram 4.36 Levels of support and resistance with the descending tendency.





À. Elder congestion
“It is better to draw lines of support and resistance through edges of the congestion zones, but not through minimum or maximum values. They indicate the points where most of the players changed their minds and minimums and maximums only reflect panic between poor players”.

(diagram 2).


À. Elder: “Beware of false breakthroughs across support and resistance. On this diagram, false breakthroughs are marked with letter F. Amateurs like to follow the breakthroughs, and professional like to gamble opposite direction. On the right side of the diagram, the prices met powerful resistance. This is the right time to seek possibility for sale with preventive stop at a little bit higher resistance level".

Note: on the diagram by Alexander Elder, one can clearly see regularity, which Elder himself did not indicate – levels are drawn through the previous local peaks, but after false penetrations of those levels, it does not extend limits of resistance and support.

J. Schwager draws 2 (!) inclined resistance level / support lines
* “Standard lines are normally drawn through the price extreme lines (i.e. maximums or minimums)., associated with abundant emotions of participants in tender, this is why these points may not correspond to real tendency of the market”.
• “Internal line of trend” – “shall be drawn maximum close to most of relative maximums or relative minimums and at the same time the extreme points are ignored”.





Schwager himself recognizes subjectiveness of method of “internal trend lines”, but here he makes a very important conclusion that the “regular trend lines” are:
• also subjective (!)
• and less useful (!), than its “internal trend lines”
“One of disadvantages of internal trend lines is their inevitable randomness, probably, even bigger then with regular trend lines, which, at least, are fixed by extreme maximums or minimums. In fact, quite often, there are several options for drawing the internal trend line on schedule (diagram 3.38-3.40). Nevertheless, from my experience, internal trend lines are much more useful comparing with regular trend lines in finding potential zones of support and resistance”.


Summary
1. Each of Forex “classics” have different understanding of levels of support / resistance, like levels (horizontal, inclined, inclined-horizontal, levels of moving averages, “round figures” etc.).
2. There is no clear technique in respect to which points, levels of resistance / support shall be drawn through (except for T. Demark)
3. In real trading, this automatically leads to quite different conclusions when locating those levels on the Forex currency pairs’ schedules.


Testing and practical inadequacy of classic techniques in definition of levels of resistance and support.

Jeffrey Owen Katz, Donna L. McCormick in their book “Encyclopedia of trading strategies” have indicated test results of the above recommendations of Forex “classics”:


Test 2. System, based on penetration of channel. Only closing prices are used; entrance under the market price while opening the exchange the next day, charge and sliding are taken into account. This test was made exactly like the previous one, except for accounting for sliding (3 ticks) and charges ($15 per one cycle of a deal). However, this model used to work successfully without taking charges for deals into account, on practice it failed completely. Even the better decision in the sample frame resulted in losses, and, according to expectations, it also worked with losses outside the boundaries of system sample frame./

Note: in accordance with theoretic opinion of Eric Niman, penetration of the channel upwards with the ascending trend – such penetration is supposedly a “STRONG (???) trading signal”.



Test 6. Penetration system ÌÌ/ÌÌ by closing prices with entering under stop loss order the next day. This model buys under stop loss order with penetration of resistance level, which is defined by recent maximums, and sells under stop loss order with penetration of resistance level, defined by recent minimums.

Outside the sample frame, the system worked much worse, and as could be expected with the low income and bad statistical values within the sample frame. The model was losing in average $798 per deal, lucrative transaction were approximately 37%.

Test 7. Penetration of volatiles with entering at the opening the next day. This model buys at  Ýòà ìîäåëü ïîêóïàåò ïðè opening the next day, if closing today exceeds the top boundary of volatility, and opens short position, when the price falls below the bottom limit. For the optimization period, only 240 deals were made, and 45% of them were profitable.

Test 9. Penetration of volatility, using entrance by stop loss order. This model enters market right after penetration point with the help of stop loss order. 1465 deals were executed within the sample frame. The average duration of the deal is 6 days. The system has executed 40% of lucrative transactions with the average $931 income per deal. Only long interests were profitable in all combinations of parameters. Outside the sample frame, both long and short positions were unprofitable. Only 29% of 610 deals were profitable.

Summary: testing data by Jeffrey Owen Katz and Donna L. McCormick demonstratively prove that application of mercantile systems of Forex “classics” on penetration of levels of resistance and support (as they are presented by Forex “classics”) will rather lead to loss that to payoff. This is also one of the reasons why more than 95% of traders lose their deposits at the Forex market.

Once the theory about levels of resistance and support are so confusing and subjective, one can guess what practical advices can be red about the levels of support and resistance on the websites of modern analysts, Forex brokers and Dealing Centers.

Let us consider levels of resistance support on example of 1 trading day, 12.05.2006.
At 09:00 AM, Moscow time, the current values are as following:
* EUR/USD 1.2860
* GBP/USD 1.8850







Levels of resistance support on 12.05.2006 in recommendations of analysts Alpari

* EUR/USD 1,2720 1,2475 1,29 1,3160
* GBP/USD 1,90 1,9150 1,8540 1,8130
Comments: I wonder what can Roman Pavelko, manager of Alpari analytic department, teach Forex newcomers, when
à) he mixed up positions of resistance and support by EUR/USD
b) for “intraday” (trader inside the day), “trader” R. Pavelko recommends to open a deal under trading plan through by, in 150(!) items from the currant price in the morning (any newcomer of the Masterforex-V Trading Academy knows that in 150 items of a round per day, GBP/USD shall be closed at local maximum as per calculation system of ending the intersession trend, but not to held it for “intraday”, hoping to get another 150 items up to 1.9150.
c) have you ever seen an intraday trader, who would indicate for himself a difference between resistance and support in 450 items in the trade plan for the forthcoming trading session? (GBP/USD 1,90 - 1,8540)
d) the results of those recommendations are as following – pound has penetrated for 1 item 1.9001 and reversed for 130 items to 1.8871, Euro reached 1.2958 and reversed to 1.2853.
Do you think that someone will fire R. Pavelko from his position as Alpari chief analyst? I doubt it. Then a question arises here: why and what for does R. Pavelko give such recommendations for naive Alpari newcomers and why Alpari management is completely satisfied with such a position, when traders can only lose when following those “recommendations”?

Levels of support and resistance as of morning 12.06.2006 and other brokers by EUR/USD and GBP/USD


* Levels of support of EUR/USD exchange rate are situated at 1.2780, 1.2740, 1.2685/90 and 1.2600, and resistance at 1.2890, 1.2930/40, 1.3000.

* Levels of support of GBP/USD exchange rate are situated at 1.8740, 1.8670, 1.8560, and resistance at 1.8890, 1.8940, 1.9000


EUR/USD Support: 1.2820 Resistance: 1.22940 (???)
GBP/USD Support: 1.8805 Resistance: 1.8950


Information on technical levels by EUR/USD and GBP/USD as of 12.06.2006 is not available, the levels of support and resistance themselves are informed periodically and randomly.

EUR USD
Support: 1.2840, 1.2800, 1.2770/50, 1.2720, 1.2670, 1.2630, 1.2600/1.2580, 1.2540, 1.2500, 1.2460, 1.2400/1.2390, 1.2350, 1.2300, 1.2250.
Resistance: 1.2890/1.2900, 1.2960, 1.3000, 1.3040, 1.3100, 1.3150, 1.3200/10.
GBPUSD
Support: 1.8840, 1.8800, 1.8740/30, 1.8700, 1.8670/60, 1.8630, 1.8590, 1.8535, 1.8500, 1.8450, 1.8400, 1.8360, 1.8300, 1.8270.
Resistance: 1.8870/80, 1.8915/20, 1.8940/50, 1.8990/1.9000, 1.9060.

EURUSD RES 4: $1.2990 RES 3: $1.2965 RES 2: $1.2940 RES 1: $1.2915
CURRENT LEVEL : $1.2890
SUP 1: $1.2830 SUP 2: $1.2795 SUP 3: $1.2755 SUP 4: $1.2685

GBPUSD
RES 4: $1.9080 RES 3: $1.9000 RES 2: $1.8960 RES 1: $1.8915 CURRENT LEVEL: $1.8895
SUP 1: $1.8815 SUP 2: $1.8725 SUP 3: $1.8725 SUP 4: $1.8515

Confused yet? Each broker has his OWN level of resistance and support, different from others. What true or false penetration of WHICH technical level can we talk about when the levels are DIFFERENT? Therefore, if on the diagram above for EUR/USD and GBP/USD we would draw all those levels of support and resistance from analysts of different Forex and Dealing Centers brokers – then it will be all covered with levels of resistance and support of different Forex and Dealing Center brokers only.

Jack Schwager in his “technical analysis. Full course” puts a question: “Schedules of technical analysis – are those tools for forecasting, or are they arts and crafts?”
Probably, it would be better if everybody:
1. answers this question independently, keeping in mind a great variety of the Forex “classic’s” opinions with regard to this key question for any trader – how can levels of support / resistance be found accurately?
2. makes his own mind, if it is worth to take on trust, levels of resistance / support, which are being published by different brokers and Dealing Centers on a daily basis, if
À) you do NOT know by what procedures are they compiled
B) those levels of resistance / support on the Dealing Centers websites are not made by traders (normally they are traders who lost in the past)

Therefore, a logical outcome is that 95% of traders lose their trading accounts at the Forex market.


Solving problem on location of levels of resistance and support in the Masterforex-V Trading System.

It is necessary to distinguish levels of support and resistance

1. Flat and trend
à) with flat, levels of support / resistance are horizontal
b) with trend, levels of support / resistance are inclined

2. Different levels of resistance / support CLEARLY correspond to different types of trends (when you consider 4 types of trend – then 4 networks of levels of resistance / support correspond to them ... if you use 5 types of trends for analysis – then 5 types of networks accordingly).

3. A bigger type of trend is more significant as compared with a smaller one; and levels of resistance / support of a smaller trend are more accurate, comparing with levels of a bigger trend. However, this issue was neither researched, nor studied, neither by “classics” of technical analysis, no by modern “analysts”.

4. Technique of each level of support / resistance of all 4 types of trend is clearly systemized (hundreds of students in the Masterforex-V Trading Academy put one and the same levels of support / resistance of several trends at the margin of +-1-2 items due to different quotations of their brokers and Dealing Centers on a daily basis). “Classics” of technical analysis have not considered that measuring.

5. It is necessary to consider levels of support / resistance NOT just one, but at least 2 currency pairs of allies (for example, pound/dollar and Euro/dollar, as far as penetration of support / resistance level by one currency pair + failure to penetrate the level by the second currency pair = false penetration of the first pair or penetration of the level by the second pair. “Classics” of technical analysis have not considered that measuring either.

6. The intermediate levels of support and resistance of small timeframes (for calculation of extent of recovery) are DIFFERENT from those when currencies move by trend (this issue was neither researched, nor studied, by “classics” of technical analysis).


7. Information, provided by “classics” of technical analysis on levels of support / resistance of the Forex currency pairs, contains many useful and expedient issues. Try to SYNTHESIZE independently techniques of T. Demark, À. Elder, E. Niman, D. Murphy, J. Schwager and others with the principals of ÒÑ Masterforex-V, mentioned above, into integral part, in order to realize how binary consistent patterns of the previous move can cause the consistent movement ahead.

8. Combination of 4 (and more) types of trends, helps to find local maximums of trading session at the Forex market with the accuracy up to 1-4 items

In view of this, a statement of C. Lebo and D. Lucas in “Computer analysis of futures markets”, that “we do not believe in common practice of predicting concrete prices”, sounds at least strange.
In such cases, I always want to ask a question: “whence participants of the Masterforex-V Trading Academy manage to earn profit?”
* Not to read websites of multiple Forex analysts
* To establish levels of support and resistance at different timeframes of multiple pairs of allies independently.
* To verify those levels with the original source (from which the Dealing Centers analysts copy figures of support and resistance).
* To know principles of true and false penetration of each level, as well as bounce of that level.
* To calculate endurance of currencies at trading session, after a false penetration or bounce, from which the currency returns for recovery etc.

 You can discuss the chapter with the Academy members by following the link

 Chapter 1. Trend definition in the Masterforex-V Trading System >>

Read more:

Chapter 3. Actual and false breakout of the resistance and support level. Rebound from technical level.>>
Chapter 4. Technical levels of Forex by Dow Jones agency. >>
Chapter 5. Pivot point of currency pairs >>
Chapter 6. Slanted Channels, as a tool of the Forex market analysis >>
Chapter 7. Opening of positions when using Slanted Channels >>
Chapter 8. Slanted channels in the Masterforex-V trading system >>
Chapter 9. Classic figures of technical analysis - Trend Reversal  >>
Chapter 10. Classic figures of technical analysis - Trend Reversal (ending) >> 
Chapter 11. Technical analysis - patterns of continuation of trend - rectangle >> 
Chapter 12. Patterns of continuation of trend - Gaps >>
Chapter 13. Patterns of continuation of trend - flag, pennant and wedge >>
Chapter 14. Models of the Forex technical analysis - triangles >>
Chapter 15. Symmetrical triangle - regularities and traps >>
Chapter 16. Ascendant and descending triangles - secrets of the strong signals for opening the positions >>
Chapter 17. Expanding triangle - unresolved problems of classics of the Forex technical analysis >>
Chapter 18. Trading On News: mistakes and unresolved secrets of classical analysis >>
Chapter 19. Trader's code of good practice by news under the Masterforex-V trading system >>
Chapter 20. Ally pairs: which gauge at forex is the most unbiased (impartial) and precise. >>

Book 1. The secrets of trading art from a professional trader (or what Bill Williams, E. Naiman and others did not tell traders about Forex) >>

Book 3. Points of opening and closing of positions at the Forex market (basic course) >>

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