Beats me! Because all support and resistance levels are Psychological, trading the foreign exchange market is psychological; we are not trading a scientific… maths equation… type accurate valuation of a currency.
We are trading peoples perceived opinions and emotional reactions to all the information regarding that currency. The Foreign Exchange Market is a psychological entity. It moves as per peoples thoughts, feelings, and actions.
How else can a positive news event for the dollar drive the price down… or up… or up and down? And how can a negative news result for the Japanese yen drive the price up… or down… or both?
The Living Breathing Foreign Exchange Market
Because the market frequently does all of the above as and when it feels like it. It’s like a living organism. In my opinion, the market makers just use the news to move a currency a long way in a particular direction, with that direction already decided before the news came out. But all the differing moves inbetween, are all driven by the emotions of the people involved within the forex market.
So why do some traders talk about key levels of psychological support and resistance?
I should imagine they are just copying everyone else, either that or they are trying to big themselves up to sound like they know what they are talking about. Either way…
There are “key” levels of support and resistance, but you need to know your system to know which key levels are more critical for you.
But before I get into that, let me clarify why you need to understand that all levels are psychological.
All Levels are Psychological
We understand that support is a floor. We build our house on it; we drive our car on it. If we throw a tennis ball at it, the tennis ball will bounce back up.
And we also know that resistance is a ceiling, a point that we can’t go past without banging our head. If we throw the tennis ball at the ceiling, it will bounce off and come back to us.
If we keep referring to these levels as pure support and resistance, our minds tend to think of them as just that, which leads to us trading them with the belief that it will work out for us every time.
Because a floor is solid and so is a ceiling, we cannot pass through them. Which then causes us to get upset when the price moves through it. Because of our beliefs, we become frustrated, and then we come to a point where the road ahead has 2 paths.
Either we look outwardly and blame the stupid support and resistance system that doesn’t work. Or we look internally and change our beliefs about floors and ceilings. Or we just need to think of them as psychological areas of support and resistance.
In that way, our mind can then understand that the support or resistance won’t always hold, and the price won’t always bounce there. But there is a probability that it may.
Now you know that all levels of support and resistance are psychological… which ones are key?
Well, it all depends upon your trading system and which time frame you trade. When a trader from Bloomberg talks about a key level, they are talking about a level that hasn’t been broken for a long time.
More than likely, a weekly level or monthly level. It’s key because when it gets broken, there is a high probability that the price will continue in that direction for quite a while.
It doesn’t mean an awful lot to you if you trade the 5-minute chart unless the price just happens to be bouncing right there right now. A key level to a 5 min trader is found on the 1hr chart.
So let’s recap. All levels are psychological, and a key level is just a level that hasn’t been broken for a long time. So there is a high probability that the price will bounce at that level.
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