Psychology Behind Support & Resistance

In forex, there are typically three types of market participants:

  1. Traders that have already placed LONG orders
  2. Traders that have already placed SHORT orders
  3. Traders that have not placed any orders

Traders who have taken a long position on a support level are waiting for price to bounce back to it so that they can add more long orders. Traders who have taken a short position realize that they are on the wrong side of the market and are now waiting for price to come to the support level in hopes to get out of their short trade or place a long order instead. Traders who have not taken any positions yet are waiting for price to return to the support level again in order to place a long order. When all three types of market participants decide to place a long order at this level, price will likely rebound from the support level again.

The longer is takes for price to trade in a support or resistance level, the stronger that level becomes. The higher the time frame that support or resistance level is recognized, the more significant that area becomes. Therefore, the monthly, weekly, and daily key levels are the most crucial key levels.

Round Numbers For Support & Resistance

Round numbers for support and resistance levels tend to act as a psychological level. Many traders such as retail traders, banks, and institutions, tend to place trades and close trades on level where price is rounded to a 0 or a 5.

Looking at the chart above, you can see that the level 1.3400, 1.3100, 1.2800, 1.2500, and 1.2200 acted as major support and resistance levels. Price rejected these levels very strongly.

When placing protective stops, it’s best to avoid placing it at round numbers. Protective stops on long positions should be placed below round numbers and stops on short positions should be placed above round numbers. The market tends to respect these round numbers and knowing this characteristics will be beneficial in your technical analysis.