In parts 1 and 2 of this Forex support and resistance levels tutorial we have covered short term support/resistance concepts which can be used for intraday trading. It is however important to keep the overall bigger picture in mind while trading any market, and Forex trading is no exception to this rule.
You will want to regularly check your daily charts to see the larger long term trends which are currently in play, even if you are only trading small time frames on a day to day basis. As well as giving you the chance to put smaller intraday moves into perspective, taking a birds-eye view of the market using the daily and weekly charts will help you when finding Forex support and resistance levels which have been in play for some time. These levels are often very strong and can provide excellent clues as to what price is likely to do over the coming days and weeks. This will give you a great advantage when planning your shorter term trades.
Forex support resistance levels work in the same way on all time frames. The only difference is that an established level which causes price to reverse on a daily chart could be responsible for creating moves which continue for hundreds or even thousands of pips.
Below we can see a GBP/USD daily chart which has a great example of a support zone which remained important for almost half of 2008 and gave rise to some very significant rallies, some of which were well over 500 pips in size!
Forex Long Term Support Level
The support zone is first established on January 22nd 2008 as price quickly reverses around the 1.933 level. About two weeks later on February 7th price returns to this area, stopping just short of the previous low point before again reversing. The resulting up move was over 300 pips in length. This shows us that this general area definitely has some significance and could very well act as future support. Price again drops and on February 20th and the candle for that day indicates strongly that buyers are entering the market. A relatively large lower shadow penetrating into the support zone and closing half way up the candle body is a very strong sign, price seems to be rejected again around the very dame level as before. From the low to the high, the resulting up move measured over 1000 pips and began with a candle failing to break our previous support from over four weeks earlier – A great example of support and resistance Forex Trading.
After that very large move, price eventually begins to fall again and on May 14th, nearly four months after the area of support was first established, price yet again bounces back up for a 450+ pip rally. Price action again confirms the trade with a long lower shadow failing to break this very strong level of support. The final trade occurs five months after the zone was previously identified on June 13th when the support area is again rejected and a 500+ pip rally ensues.
As we can see, confirmed Forex support and resistance levels on a longer term time frame can offer some fantastic trading opportunities. Using this kind of information to inform your intraday trading has the potential to deliver truly great results, especially when you are also using other forms of Forex technical analysis to make your decisions.
Do Not Forget About ‘Broken’ Levels
We know from the earlier parts of this tutorial that Forex support resistance levels often switch roles once a level is broken. Support can become resistance and vice versa. This does not just happen on short time frames where previously important price levels are still fresh in the minds of traders. A broken level can still have great significance many months or even years after it was first violated.
The image below shows a daily GBP/USD chart from the beginning of 2010 where the market was falling at quite a rate. On February 5th the market comes to a halt around the 1.555 level and an area of support is formed. This level holds price up for the next few days and prevents any further down movements. The down trend is however a strong one and the area of support is soon broken. A few weeks after support failes, the down trend takes another pause and returns to the previous support area from below on February 23rd. As we can see, the previous support level acted as resistance and sent price falling by over 700 pips, a classic Forex support and resistance trading example. By April 15th, over two months since the original support level was formed, the area again shows its significance as a strong point of resistance. Traders have not forgotten the role which this price level has previously played. Price is unable to penetrate up and through resistance and ultimately drops over 1200 pips before finding a bottom!
Former Support Continues to Act as Resistance
Hopefully this clearly shows that long term Fx support and resistance levels are equally as important as the ones we use on a daily basis, and in some cases much more so. As a new trader it is vital that you take the time to learn how to identify these key areas on all time frames. There are several Forex support and resistance indicators which can help pick out the important levels for you on your chart, but it is highly recommended that you develop the skills to be able to do this yourself. If you are willing to put in the time to learn Forex trading then after a short while this kind of analysis should become second nature to you.
Also remember to keep in mind that just because a particular zone is ‘broken’ it is not necessarily irrelevant. Watch out for price returning to a previously important area and retesting the old level from the other side. As you learn to trade Forex you will see that some of greatest trades are confirmed by the role-reversal of support/resistance areas, even after many months have passed since they were originally broken.
Hopefully you have enjoyed the Forex Firefly support and resistance tutorials for Forex traders. Feel free to leave a comment with any questions you may have or any general observations about the content in these tutorials or currency trading in general.
