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. Conversely, when a majority of traders believe that acertain price level or region is relatively high, selling pressure willoften result and the price should generally go down, thereby creatinga bounce down off resistance. For an example of resistance, if the price region surrounding1.6000 on the EUR/USD is considered collectively by traders tobe relatively high (which, as of this writing, is the case), traderswithout positions in the market may wish to sell short the pair ifthis level is reached, with the intention to profi t by buying back(or covering) later at a lower price.By the same token, traders withexisting long positions in the pair may also wish to sell at this level,effectively closing their positions and taking their profits.All ofthis selling activity places downward pressure at this 1.6000 level,60 Suppor t f or Resi st ance ( and Suppor t )thereby creating signifi cant resistance in the form of a ceiling onprice action.The expectation, then, is that when price reaches asignifi cant resistance level, it will turn and go back down at thatlevel.If, on the other hand, the price region surrounding 95.00 on theUSD/JPY is considered collectively by traders to be relatively low,traders without positions in the market may wish to buy the pairif this level is reached, with the intention to profi t by selling theirpositions later at a higher price.And traders with existing short posi-tions in the pair may also wish to buy back (or cover) at this level,effectively closing their positions and taking their profi ts.All of thisbuying activity places upward pressure at this 95.00 level, therebycreating significant support in the form of a floor on price action.The expectation, then, is that when price reaches a significant sup-port level, it will turn and go back up at that level.Sideways price action between both a support fl oor and a resist-ance ceiling is called a trading range, as displayed in Exhibit 3.3.These occur quite often in the foreign exchange markets.Manycurrency traders exploit breakouts or breakdowns of low volatilitytrading ranges as one of their primary trade entry tactics.This willbe discussed further in Chapter 5, which covers trading methodsand strategies.The simple fact that support and resistance levels are oftenrespected by price numerous times before ultimately being brokenis, in itself, a remarkable phenomenon that can contribute a greatdeal to any foreign exchange trader s strategy.Therefore, wheneverprice nears historically signifi cant support or resistance levels, trad-ers and analysts will invariably begin paying close attention to the61 Techni cal Anal y si sEXHIBIT 3.3Trading Range Support and ResistanceSource: FX Solutions FX AccuChartsaction, waiting for the level in question either to be respected orbroken.These traders and analysts will then act accordingly.Another important aspect of traders collective price memory asit relates to the concept of support and resistance lies in the extraor-dinary tendency for a support/resistance level to transform into theopposite, once broken.For example, when price breaks out above aprevious resistance level, technical analysts and traders would thenconsider that broken resistance level as a new support level.By thesame token, when price breaks down below a previous support level,technical analysts and traders would then consider that broken sup-port level as a new resistance level.62 Suppor t f or Resi st ance ( and Suppor t )The most plausible reason for this phenomenon, from a tech-nical analysis perspective, is that once a currency pair breaks asupport/resistance level in a convincing manner, traders begin tobelieve that the pair has reached a whole new plateau of price activ-ity.Therefore, mass trader momentum will move away from the pre-vious price level, towards equilibrium at this new norm.The borderbetween the old plateau and the new one is the broken support/resistance zone, and it will therefore be expected to act as a futureprice barrier.For example, if the GBP/USD breaks out and remains above ahighly significant resistance level that represents a multidecade high,say at 2.1160 (as of this writing), traders will begin to believe thatthe pair will continue to move within this new, higher plateau.This isbecause it would be such a technically rare feat to break this lofty levelthat price must be trending up with extremely strong momentum.Sowhen the level is finally broken, if price ever subsequently went backdown to revisit that broken resistance line around 2.1160, it wouldsignal a relatively low price, and therefore a good place to buy at sup-port.And when a lot of major market participants all decide to buy atsupport, it can be manifested in price action as a bounce up off sup-port.This phenomenon can be seen in Exhibit 3.4.Of course, as with every aspect of technical analysis (or any otheranalysis, for that matter), this tendency does not always work outas expected.But the phenomenon is realized frequently enough inthe foreign exchange markets to warrant serious consideration.Theexpectation that support becomes resistance, and resistance becomessupport, is one of the central themes of the support/resistance con-cept, as well as of technical analysis as a whole.63 Techni cal Anal y si sEXHIBIT 3 [ Pobierz całość w formacie PDF ]