Support and Resistance

The key, therefore, is to examine not only the shape but also the timing of the pattern. What if you could predict the yearly high and the yearly low in a major currency? If, at the start of the year, you could have a definite idea where the high will form in the Japanese yen or the Canadian dollar or the euro? Or if you knew where the market was headed many months ahead of time? Making an educated, accurate forecast of next year's high and low in every currency is surely the dream of every trader — a fantasy of omniscience and unlimited power over the markets.

In trading, as in war or building suspension bridges or performing transplant surgery or creating a new auto design or any complex undertaking, success is a function of many different elements—a combination of having the proper tools, the necessary knowledge, and
the appropriate personal characteristics. If you would like to be one of the few who make accurate, high-probability, long-term forecasts about market highs and lows, then read on, because there are some little-known tools and a coherent body of knowledge that can help
you.

The practice of technical analysis has a few commonly accepted assumptions.

1.Charts have patterns that can be identified and will reoccur.
2.Similar chart patterns exist in different time frames.
3.Prices in a given time frame will center on a consensus value, and when price moves
away from that consensus, it will tend to revert to a mean. But this mean itself will be
moving and changing as the market unfolds.
4. Support and resistance are real phenomena, and can be measured, predicted, and
projected.
5 Time frame charts are interrelated, move simultaneously, and can be visualized as
existing within each other.
6. Historical price charts of freely traded financial markets are the visual representation
of human crowd psychology in action.
7. Support and resistance in different time frames react to price in predictable ways.
The shorter time frames will react first, and then progressively longer time frames
kick in.

It is not enough to know where support and resistance lie in the near future. We must also know whether that support or resistance will be strong or weak. If it is strong, it will hold, causing the market to change direction and turn back; if it is weak, it will break and give way, letting the market proceed farther in the same direction.

Determining the relative strength of support or resistance is a bit of a dilemma because there is nothing on the conventional single time period chart that can tell a trader if resistance or support will be strong or weak. And yet this is often the most important information a trader could have, because it commonly is the determining factor in deciding
direction. If a trader has a firm handle on direction, then many of the other challenges fall into place and steady success is achievable.

If, for example, the market has been trending upward in an hourly chart and the trader thinks it may turn around and enter congestion, he may indeed be correct. But without additional information there is no way to confirm this suspicion until after the market has made its move. However, if the trader places the hourly chart and its projected future
support and resistance within the matrix of the daily chart's projected support and resistance areas, the context becomes clear. If the trader can see that hourly resistance has reached the anticipated daily resistance and daily resistance is anticipated to be strong based on the
daily's position within the weekly and monthly matrix, then he can take action with about three times the confidence that would otherwise be warranted for this trading situation. That's a huge advantage.

Charts from all time periods have similar patterns that occur and reoccur, and all time frames are related. In other words, a market top on an hourly chart will of necessity be reflected by a market top on the five-minute chart of the same symbol. Traders generally recognize that it can be useful to look at hourly charts and daily charts of a market,
although the techniques of coordinating the time frames may not be widely understood. But it is a rare trader indeed who understands that the patterns in long-term charts such as monthly, quarterly, yearly, two-and-a-half-year, and five-year charts are all similar and can
be profitably included in the trader’s analysis.

If I were to show you a long-time-frame chart but without the time designations on the horizontal axis or the price designations on the vertical axis, there would be nothing to indicate whether you were looking at a fifteen-minute chart, an hourly or a daily chart, or a
weekly or monthly chart. By now you can guess where I'm going with this: it could also be a quarterly chart, in which each bar represents the market activity in one quarter; or a yearly chart, in which each bar represents one year's market activity; or an even longer-term chart,
in which each bar represent is two and a half years' activity, or five years', or ten. On each of these charts, we can see trends, congestion, types of trading, dot pushes, terminations, and so forth. And on each chart the support and resistance levels can be projected into the
future.

Why is this useful? A moment's reflection will make that clear. If we can project resistance and support on a yearly basis, then we have an advantage in predicting and monitoring market turns in those areas. It, for example, we can determine the market's yearly high or low in a major Forex market, then we can potentially take advantage of long-
term moves with immense profits built into them.

If we see a daily chart that shows what we call an "exhaust" and the entry signal that follows it. An exhaust is a market move of very high energy that breaks through nearby support or resistance and then reverses, much like a column of water in a fountain that has been
pushed up and then tumbles back on itself when the energy that pushed it up can no longer hold up the weight of the water. For a trader, the challenge is to identify that exact moment when the push that sends price in one direction or the other has exhausted itself and the
retracement has begun.

Trading is a difficult business. It requires both on-target perceptions and mental strength. First you have to see the opportunity. Then you have to take the opportunity. You have to stick with your decisions through thick and thin as you monitor the trade, knowing exactly what has to happen if you are wrong and what has to happen if you are right.

Trading the Forex with an eye on long-term charts can help the trader keep the market in context and withstand the many wide countertrend oscillations that will shake out the trader who is not equipped with the long-term perspective that Daily, weekly, monthly and even yearly
charts provide.

To be better than the rest in trading, as in so many fields, we have to do something different from the rest. In trading the global currency markets, one tool that can make a real difference is a careful analysis of the big picture, using multiple time period analysis.

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