Supply & Demand or Support & Resistance?
As you explore Forex trading you will hear talks about supply & demand that are just like discussions about support & resistance. This is because in all reality they are the same thing but you will find that support & resistance is more commonly used and related to technical analysis, whilst supply & demand is more commonly used and related to fundamental analysis. That said; over the past few years supply & demand does seem to have become slightly more prominent verbiage in the world of technical analysis. Here at ElectroFX.com we have made use of both references and you will learn how in this lesson as they are each used for a purpose.
We are now at the heart beat of how the Forex market moves because this piece of the puzzle is governed by the laws of supply & demand. Price will bounce around between these areas and create new areas as it progresses until the end of time as we know it. You can look at each new area of support & resistance as an area where, when revisited, price may potentially stall and sometimes even reverse. Let’s take a look at how these areas of support & resistance are created.
Recent Support & Resistance
The reason that you were introduced to chart patterns first is that recent support & resistance is inherent within them. If you have understood correctly how to read chart patterns then you already know how to read recent support & resistance, you just didn’t realize it yet. Let’s dive in and take a look at how it works starting with the trend continuation pattern.
As price swings up and down creating this trend continuation pattern it leaves support & resistance areas in its wake. When price swings down due to selling then it leaves behind an area of resistance. When price swings up due to buying then it leaves behind an area of support. When an area of resistance is broken it must be watched from the other side in case it will now act as support. Here at ElectroFX.com we call this the mirror flip. Naturally this applies both ways and if an area of support is broken it may then act as resistance.
In this next image we will look at a double top in order to understand this support & resistance concept further. This double top pattern is followed by a continuation scenario that often plays out.
In the first image you were able to see a visual of how the mirror flip works for resistance becoming support. In this image you can see the other side of that coin with support becoming resistance. The idea of support & resistance should be very easy for you to understand after your lessons on chart patterns.
Just to be thorough in your introduction to support & resistance let’s take at these areas mapped out on a range pattern.
These areas of support & resistance have now reached triple tap status and once broken are more likely to have a powerful move. The same applies to the triangle situation which is also part of the consolidation family.
Recent Support & Resistance Layers
Sometimes the market will set-up exactly as those previous images on this page but there are plenty more variations that can occur. If you want to increase the amount of trades you are able to take then you will need to apply the same concept of ‘market layers’ to how you are reading support & resistance.
Here you can see the same trend continuation pattern that we just reviewed only now the mirror flips are not holding. How these higher lows are still holding though should look very familiar to you as it has already been introduced to you before. Remember the 3-point turn and how the double tap element was achieved as layers were introduced? This is now what we are doing with support & resistance. In order to keep the image clean and focused only the minor support areas that could be used have been marked in. These minor support areas are helping you find probable locations for the higher lows that follow the higher highs.
Let’s now jump back to the double top example only a slightly different variation. In this next image you can see how the same idea is now applied to resistance instead of support.
Once again only the minor resistance area that would have been used is marked in. With this example the minor resistance area helps you find a probable location for the lower high to follow the lower low.
You should now be piecing together chart patterns, market layers, and support & resistance as a unit. Here at ElectroFX we just call those minor areas supply & demand areas to differentiate between the layers. The areas created by the fatter black line would be the support & resistance areas, and the areas created by the thin black line would be supply & demand areas. This is not necessarily technically correct and nor does it matter, this is just a way that we use the various verbiage available to communicate with one another.
Not So Recent Support & Resistance
If you are just keeping things simple for now then reading 2 layers of chart patterns with their inherent recent support & resistance will be enough. As you progress though you will need to consider the not so recent areas of support & resistance. In this next image you are looking at what is essentially the next layer up, there is only so much room on a page and this is as far back as can cleanly be shown. There will be times though that the next area of support & resistance is much further back than this.
Keeping in mind that what is recent to you is relative to what kind of scale you have chosen to trade, all of your recent support & resistance activity is inherent in the chart patterns. There are however occasions where price is heading in to new price areas that have not been visited for a long time. In those situations if you want to know where the next potential area of support & resistance is you just need to look above and to the left of current price, or below and to the left of current price, as far back as you need to. With free membership here at ElectroFX.com you will find software that draws all this in for you but for now this is your introduction. As you go beyond basic training you will learn more and more about reading support & resistance as a key component to your success.