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Support and Resistance Strategies
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The Pizza Incident
The Pizza Incident
To remind yourself of how support and resistance works, think of a freshly baked pizza.
Have you ever tried to pull a pizza out of the oven only to encounter the pain of a hot pan? Your first reaction may be to pull your hand away from the pan and it will take you a while before you attempt to pull the pizza out again. When you attempt to do so again, you will most likely proceed with more caution than before, and will likely test to see if the pan is still too hot.
Similar to the pizza example, prices in the forex market react to “hot” zones. Take the example of the AUD/USD. In August of 2003 the pair approached the .6340 price area only to find that it was too hot to handle:
Continuing with the pizza metaphor, the pair approached what it thought was a ready pizza, only to burn itself on the hot pan (in this case the .6340 price level). The difference in this case however, is instead of eventually coming back to the .6340 level, the pair decided it was too hot to handle and continued to move away.
Often when a currency pair reaches a level of strong psychological or technical importance, it often pauses to test which direction it should move in. Often times major trends will end when they meet resistance from areas of importance. Above is an example where the AUD/USD broke its downward trend and reversed direction, creating a new upward trend.
The unique aspect of resistance zones is that once they are broken they can often act as a new support level of the price. The same is true for support zones as they often become resistance once broken. This is why you see here, the zones are referred to as both support and resistance. The AUD/USD demonstrates a perfect example. It breaks the .6340, a proven support level, only to find resistance when trying to break back above it.