Support and Resistance – the two key words

To really understand the behavior of a currency on the Forex market it is important to see how it has behaved over a period of time. Taken over the course of a very short space of time, it is possible to make data mean just about anything. This, in turn, means that the data will be almost worthless. Over a longer period of time, however, patterns always seem to assert themselves, and establish a firm basis for predicting the future behavior of a currency price. Among the most important figures that appear in a pattern are the support and resistance points.

The point of “support” for any currency is the price level beneath which a currency never trades – effectively its market “bottom”. Whenever the price reaches this level, it almost always bounces back upwards, and for this reason many people will invest when a currency hits that point. Conversely, the “resistance” point is the traditional high point of a currency price, above which it never trades. If you are looking to cash out, this is a good reference point.

Of course, the old saying “there’s a first time for everything” exists for a reason. There will come a time when a currency breaks its support or resistance levels, and this is seen as hugely important. When a currency does this it will be expected to continue this trend, possibly for an extended period of time. It is therefore a good time to get “in” if it is rising or “out” if it is falling.

Where do you get your Forex data?

The systems of compilation for Forex data vary a great deal. There are as many different types of collation as you can reasonably imagine, and some of these methods have been proven over time to be, if not foolproof, then at least incredibly informative. Access to the right data is important in ensuring as high a possibility of success in your trading as you possibly can. This kind of data is freely available, but what information you can glean from it is inevitably limited as it will be full of figures that carry varying levels of relevancy. Raw data is useful only in so far as you can be bothered wading through the masses of information to find only the best predictors.

The data that will be truly useful to a trader is the information produced in a quickly readable form using only the data that is absolutely relevant. This comes in the form of charts and graphs, and this kind of data is available in up-to-date form from any good broker. There are historic Forex charts freely available on the Internet, and these can be used in order to help you understand market patterns. Once you sign up with a broker you will have more recent information, which is absolutely essential for forming a strategy. Your broker will also (usually) give you the chance to have a “practice account” which tests your reading of the data so that any mistakes you make are relatively harmless. In this way you can learn to read the data proactively and safely.

Analyzing the market to your advantage

It has been said by many experienced traders that Forex is a more volatile market than any of the available options. The theory goes that it is difficult enough to judge a single company’s value at a given time and in the future, just imagine how hard it is to do the same thing with a whole country. This philosophy takes the point of view that analyzing the Forex market relies on careful reading over a period of time. Some knowledge of world affairs is also advantageous, as it allows you to be aware in advance of the timing of important announcements which can cause market volatility.

Others will treat the Forex market exactly like they would treat any other stock market, and take a more technical approach to analyzing their next step. This is not as simple a process in Forex as it is in the stock market, as the Forex is a 24-hour market, and the data-gathering systems require some modification to work effectively on Forex. Nonetheless, where these methods of technical analysis have been correctly applied, they have proved to be an effective way of making a profit on the Forex market just as their original forms proved on other markets.

While the first method is more of a global, evidence-based approach and the second tends towards techniques and patterns, both have been proven to be successful if correctly applied. It is highly advisable, though, to recognise which one to apply at a given time, as confusion can easily arise around what exactly the data tells you. Pick the method that you require and use the other to supplement it. That is the only way you can confidently operate in the long term.