EURGBP – Support and Resistance

One of the most powerful tools at a trader’s disposal is the use of support and resistance levels. Many traders incorporate support and resistance levels into their trading strategies however they fail to understand the meaning behind these levels. It's not just random price action that creates these precise levels, it's the power of mass human psychology.

Think of support and resistance levels as a point of memory. Once these levels have been formed as a point of memory by people involved in the trading of that market, there will be allot more orders in and around these levels. Let's assume a trader got long a stock at $100. The stock then proceeded to sell off and soon it was trading down near $80. Weeks later the stock is trading back up near $100 and the trader who originally bought at $100 decides to sell their position to ensure they don't lose money. These sell orders around the $100 level cause price to stall and sell off from this level again which is how these types of levels become stronger. Only when you start to think about how traders might be positioned and what they are thinking, then you start to really understand the meaning behind these levels of support and resistance.
 
EURGBP is a market which is showing a classic example of the mass psychology behind current support and resistance levels. Take a look at the daily chart as an example below. Price is currently trading near its 12 month low, which means, people in the UK can now buy euros for nearly as good a rate as they have been able to for a long time. This entices individuals and businesses to sell pounds and buy euros as they feel that they are getting a good rate for the transfer. As you can see in the chart below, price came down to test the 0.7000 level and buyers of euros against the pound stepped into the market to push price higher. This price action confirms what we thought might be the market sentiment and feeling amoungst traders as price tested the old lows. If you think about key levels before price gets to them you can start to build trade plans around them should price react accordingly. In this circumstance if your hypothesis was that price would find support at 0.7000 and get a bounce from there, then you could have been looking for clues that price was starting to trade higher on the lower timeframes in order to get long this market.

By thinking in terms of what the mass market psychology is around key levels, you can start to pre-plan where to enter into high probability trades. This type of thinking gives you a distinct competitive advantage as it forces you to pre-plan trade ideas which are backed by the mass psychology of the market. By the way, support and resistance levels don’t just show themselves on the daily timeframes and up, they can be seen on all timeframes right down to the 1 minute chart so there’s a huge pool of opportunity out there if you’re willing to search for it.

Happy Trading!    

The TWP Team