In this section we will handle the subject of forex analysis in much greater detail, with the hope of providing you a framework with which you can create your own approach and style of analysis.

We will attempt to provide general principles to be adhered to while performing the two types of analysis — fundamental and technical — and then we will look at the indicators and news releases in detail. The golden rule is that the trader should always aim to create a holistic picture from the patchwork of data that he has to go through on a daily basis. He should create models, and test them in light of market developments and the fundamental changes occurring in the analyzed nation’s economy. A mere knowledge of the data, without the power to evaluate and reconstruct it to suit our purpose, is unlikely to be very beneficial. The successful trader succeeds because he understands, while the unfortunate one fails because his attention span is too short to evaluate the information.

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The commitment of traders report is a little different from the previous indicators. It doesn’t measure any economic indicator, but merely states the holdings of commercial and speculative participants in various futures markets which are mostly concentrated in New York and Chicago. The report is released every Friday by the CFTC (Commodities and Futures Trading Commission) and reflects the commitments of traders on the prior Tuesday.

The COT report divides traders into three categories: commercial, non-commercial, and non-reporting. The group “commercial” mostly includes commodity producers (in the case of forex, exporter firms) who use futures to hedge against future price movements (in other words, they would like to eliminate the impact of future price fluctuations on their profits or losses: the exact opposite of what speculators aim at). The group “non-commercial” includes speculators. Speculators have no interest in the actual commodity (be it forex, or lean hog) but merely desire to profit from price fluctuations. Finally, the group of “non-reporting” traders includes small speculators who are of significant market impact, and are therefore not required by the CFTC to report their positions.

What kind of use can the trader make of the COT report? When either speculators or commercial participants have positions that are extreme in comparison to the average of a predefined period, some traders assume the emergence of a small scale temporary bubble, and they will buy or sell to counteract the extreme long or short positions registered.

Others suggest that small speculators, devoid of the tools and knowledge of the bigger participants, are usually wrong, and act on this assumption by doing the opposite of what the non-reporting group does.

Another reasoning claims that the commercial group are likelier to be correct on their analysis as they have interest in and direct knowledge of the commodities in question.

In general, each trader is free to make his mind as to which of these theories he will subscribe to, and he may eventually choose not to use any of them. But in any case, basing one’s assumptions on strong fundamental reasons, rather than the positioning of any group in any market is the course of prudence. This is not only because a successful trader performs his own analysis, but also because the pockets of the large commercial and speculative participants are likely to be far deeper than that of the average trader: Performing proper research and analysis is always better than following anyone, or any indicator blindly.

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As we noted before, fundamental analysis offers the best guidance for determining price trends. To give a simple example, in a stable economic environment, with good economic growth, and healthy employment statistics, central banks are almost certain to respond to high inflation with interest rate increases, to which the markets will usually react by buying and favoring the currency of the nation in question. And as central banks seek credibility in their actions, and are not very likely to zigzag with their rate decisions, the trader can anticipate the beginning of a long term trend through his analysis of the central bank's policies and goals, and by following his analysis, he can realize profits.

Of course, there's a lot more to be said about this subject, but the basic principles are simple. The attention span of the market is not long enough to fully evaluate the significance of fundamental developments, and economies absorb changes to fundamental values slowly and gradually. There's ample time for the trader to profit from such changes, once he's aware of them, even if he catches the trend after it's fully underway.

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The second type of inflation indicator, the Consumer Price Index (CPI), has far greater bearing on the choices of policy makers (such as the US Federal Reserve), and the market in general attaches to it a far greater degree of significance than the PPI. The CPI, as a measure of living costs, has a direct bearing on interest rates, and eventually, the timing of growth cycles (in other words, booms and busts).

The consumer price index measures price changes at the retail level. It registers the price fluctuations only to the extent that a retailer is able pass them on to the consumer. Thus, in an environment of high competition and falling or low demand growth, the retailer may have to cut on his profits, and a rise in PPI may not be reflected in the price the consumer pays, as measured by the CPI.

Rising CPI signifies high inflation, and central banks in general have the goal of keeping inflation low but positive, so that the consumers' purchasing power is not eroded. A rising, but slowing CPI defines disinflation: Prices are still growing, but the speed and intensity of price increases is slowing. Finally, a negative CPI implies deflation: A situation which often suggests that demand across the board is contracting, and the consumer can simply choose to wait for as long as he can before he buys a product. The longer he waits, the lower the price becomes.

It may sound complicated, but the beginning trader will do well by just keeping in mind the relationship between central bank interest rates and the CPI: higher CPI leads the central banks to raise rates, and as higher rates mean higher yield, the currency with high interest rates backing it tends to appreciate. Lower or falling CPI means that inflation risks have receded, corresponding to lower growth, and the central bank is free to lower rates to boost growth.

The CPI is also released monthly by the BLS (Bureau of Labor Statistics).

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We mentioned in the previous section that we’d be discussing inflation, and it’s time to look at one of the two major indicators of inflation that the markets tend to watch at all times.

The producer price index, or PPI for short, is the measure of changes in prices charged by wholesalers to their clients such as retailers who then add their own profit margin to the producer’s price and pass the product to the consumer. Since the producer is at the beginning of the supply chain, under normal economic conditions where there’s healthy consumer demand and the economy is growing, the PPI can serve as an early-warning system for predicting price changes at the retailer end of the chain. The producer price index is different from the consumer price index (CPI) in that it also includes commodities and intermediate materials (such as a car engine or its components, for which the consumer has no use) and is therefore more responsive to changes in global commodity prices and manufacturing industry trends than the consumer price index.

In general, the PPI is more volatile with larger fluctuations than the CPI, and is useful only in giving a sense of the underlying price developments that are not always reflected on the consumer’s bills.

The PPI is one of the oldest indicators in existence, and its time series can be stretched back to the 19^th century. It’s updated each month by the BLS (Bureau of Labor Statistics).

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Well a good starting point is to look at just what Forex trading is and who the players in this market are. We should also think about just why you should be learning online Forex trading and thinking about starting you own online Forex trading business.

The Forex market (which is sometimes referred to as the FX market and for which the full title is The Foreign Exchange Market) was established as we know it today in 1971 following the demise of fixed currency exchanges. Forex currency trading is conducted around the clock, 5 days a week, and daily currency trades are worth in the region of $1.9 trillion US dollars. This means that the Forex the largest market in the world and puts the major stock markets very firmly into second place.

A world-wide market established to facilitate the buying and selling of currency, the Forex market involves large organizations, such as central governments, commercial companies and international commercial banks as well as smaller players such as brokerage houses and individual brokers.

There is no set location for the market (although there are major trading centers around the world in a number of cities such as London, Frankfurt, New York and Tokyo) but it is essentially an 'over-the-counter' market with the vast majority of trading being conducted by telephone and on the internet.

The exchange of currencies is a central element in supporting global trade and, as the major currencies such as the US dollar (USD), the British pound (GBP), the Euro (EUR), the Japanes yen (JPY) and others move against each other and the foreign currency exchange rate for any given pair of currencies changes, there is the opportunity to make money from currency exchanges.

The major players in the market take advantage of this by buying and selling in deals which often run into many millions of dollars, but the smaller players are also extremely active and often trade in deals of as low as one hundred thousand dollars. And, by trading on the back on the smaller players, individuals can get into the market with a lot less than that!

The fact that even small players can join this market means that, as long as you are prepared to take the time to understand the currency markets and to learn the skills of Forex trading, then, with a little bit of capital to invest, it is possible to enjoy an excellent income from online currency trading.

Despite the fact that you cannot trade on your own and will have to use the services of a Forex broker, you certainly don't need a fortune and many Forex brokers will now allow you to open an online Forex mini account with as little as $250.

The Forex market is a technical market and it does takes a while to come to grips with the basic principles underlying the currency markets, to develop the necessary skills in the use of some of the 'tools of the trade' (like technical and fundamental analysis tools) and to learn Forex currency trading online.

Despite this, you do not have to be an expert in the currency markets to profit from them. As long as you take the time to learn foreign exchange currency trading and put in a bit of effort it is quite easy to gain enough of an understanding to begin making money through Foreign trading online.

Foreign currency trading provides an excellent opportunity for the small investor to make money but learning to trade Forex is essential before heading out into the market.

Through a large and growing collection of articles covering everything from the history of foreign currency trading to fundamental and technical analysis, psychology and strategies, tools and software we aim to help you learn to day trade Forex quickly and easily.
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Gross domestic product (GDP) is a measure of all goods and services produced inside a country's borders. As such, it doesn't include imports, even though imports can add to job creation and prosperity in an economy. It's loudly discussed by all the major media outlets, and the trader needs little effort in finding and evaluating the report. There's no need to go into the details of its calculation here, but we should briefly discuss its implications on the markets, and what a good or bad GDP number means.

GDP is valuable for the markets for a number of reasons. First, it provides the trader or analyst with a general, all-in-one snapshot of the economic situation of a nation. Without having to go through a large list of statistics, and wading through a sea of numbers to gain an overall grasp of the latest developments in an economy, the analyst finds a comprehensive report in the GDP number and its details. Second, it allows a quick and easy comparison between nations in terms of their economic prowess and health. Third, and perhaps most importantly, it tells the trader whether a nation's economy was growing or contracting during a time period. As the overall health of an economy determines the lending policies of major banks and other financial actors, the GDP number is prone to cause periods of panic and euphoria in the market, and the patient, sensible trader can exploit these periods for his profit.

A positive, rising GDP number is a sign that the economy is growing. A positive, but lower GDP value (in comparison to the previous quarter), is a sign that GDP growth is decelerating. Finally, a negative GDP value over two consecutive quarters is usually considered a recession by economists: a period of falling demand, production, and economic activity, and a source of panic and great concern for financial markets in general.

GDP releases, along with inflation statistics (which we will discuss shortly), are some of the most important parameters that central banks use in determining their interest rate policies. GDP growth can, under certain circumstances, cause high inflation through wage growth and price rises, and central banks try to combat this development by raising interest rates (which leads to higher borrowing costs, more expensive investment, less growth and less inflation.) Conversely, a period of low inflation, or low GDP growth can lead central banks to lower interest rates with the goal of rejuvenating economic activity. Forex, and all financial markets are very responsive to changes in central bank interest rates, and the trader can keep his eyes on GDP statistics and inflation numbers as advance warning on changes in central bank policies.

Let us finally mention that fundamental "analysis" that depends merely on the headline number can sometimes be misleading. The GDP number can be flawed as an indicator of economic health for a number of reasons, but one that must be born in mind is that inventory accumulation by firms (rising stocks of unsold goods at firms' warehouses) is added as a positive to the GDP value, and this sometimes can cause an unreasonably healthy picture to be portrayed before periods of economic slack. Since inventory accumulation can be caused by insufficient demand, the trader should always check this component of the release for anomalies before making a judgement.

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Fundamental analysis concerns itself with the causes of price movements. It doesn't attempt to predict future price movements per se, but because economic events move far slower than market developments, it's usually the case that a phenomenon established by fundamental analysis will be valid for a longer time than the market reacts to it, and discounts it (due to the market's erratic, irrational and emotional behavior), and it's this fact that the trader exploits for profit.

Fundamental analysis is about economy and politics. It is important to keep up-to-date about weekly employment statistics, consumer price inflation, interest rates and similar "hot" indicators that are at the forefront of newspapers pages and TV screens, but just being aware of them and expecting the market to react to them in the desired fashion in a short time is not fundamental analysis, nor is it common sense. In fact, as we mentioned in the earlier paragraph, the main reason that the trader can profit through fundamental analysis is that the markets do not react reasonably to fundamental developments.

Let's illustrate our point with an example:

Until the autumn of 2007 the US had very low unemployment: Toward the latter part of the second presidential term of George W. Bush, unemployment in the US moved below five percent, and it remained at those levels for a considerable time. Most of the data released through this period remained positive overall, with the exception of the housing market, where conditions had been deteriorating since 2005.

Thus, most of the data and news releases were positive, and if we're seeking to show that fundamental analysis provides good guidance to the trader, it's clear that we do not have that guidance in the patchwork of numbers that attracted the most of the media attention. Focusing on the news releases, without placing them into a working context, without understanding the workings of the economy, the trader is as blind as the proverbial blind man who tries to describe an elephant by a few gropes at its feet, the tusks and the trunk.

Like most good things in life, being successful in performing fundamental analysis requires study and patience, but once again, there's no expectation of exceptional skills from the trader. Economics is a popular field, and most of the data necessary for understanding the market is available online with research provided for free, in many cases, by big banks and government institutions. What the investor is expected to do is not to memorize the numbers and compare each week's release to the previous one, but form a coherent mental picture of "what happens why".

Finally, let us repeat here that most of the major fundamental events that the market appears to discount in a few days of trading at most, have in fact effects that last far longer and reach far deeper than the violent but brief reactions of price movements suggest. Interest rates and unemployment statistics are simple but effective examples for demonstrating our point: The effects of the interest rate reductions during 2000-2001 had lasted for at least 4 years in the real estate market, and had a great role in establishing the downward dollar trend that lasted between 2001 and 2008. Similarly, the trend of job creation in the US and abroad, once begun, had a deep and lasting impact on global stock prices and forex trends which went through all sorts of panics and shocks during this same period (the Iraq War, and several defaults by some large firms are good examples). In the end, however, the so-called big picture of stability supplied by high employment and low interest rates always brought the markets on track. What caused them to collapse eventually is outside the subject of our discussion. But, the fact that fundamental economic events are long-term, and that their effects last longer and are deeper than the market discounts is a fact that is not changed by all these deveoplments.

Let us briefly examine a number of the major economic indicators used in fundamental analysis.

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Technical indicators are utilized by traders in the same way that price patterns are. In the case of indicators the purpose is to give the chaotic jumble of prices and quotes some resemblance of order through the employment of simple mathematical tools. While the idea of engaging in mathematics may sound intimidating to many at first, all of these indicators have been standardized through the years, and the trading software that draws them will in general leave little discretion to the user. The mathematical formulas themselves are usually simple and straightforward, and some high school mathematics is the most that is needed to understand why and how are they are constructed.

How many indicators should we use? Which indicator is the best for evaluating a chart? These are the questions that often confuse the inexperienced trader, and leads the experienced trader to claim that trading is an art and not a science.

Let’s try to answer those questions one by one:

How many indicators should a trader use?

The answer to this is not as difficult as it seems at first glance. It can’t be denied that the more indicators there are on the computer screen, the more information is available for the trader. Moving averages of different time periods, for instance, can provide a good signal for determining the next obstacle, the next support and resistance levels for the price.

But the question is, how much information does the trader need? Does he aim at making quick profits on an intraday basis? Or, does he aim at making profits from monthly movements? Obviously, a long term investor has very little use for a 3-hour moving average.

And beyond these questions, how much information is the trader able to evaluate meaningfully before losing focus and being lost in meaningless mental discussions about whether this or that indicator gives the right signals?

Naturally, people will have differing answers to these questions based on personal experience, and there’s nothing wrong about that, as many of the indicators themselves are the same tools disguised in slightly differing formulae. It’s very hard to decide whether the RSI or Stochastics is more accurate in giving signals, but it’s not that hard to claim that what they do is by and large the same thing.

Simplicity and clarity, as in everything else, are the best pieces of advice that a beginning forex trader can pocket from this discussion.

Which indicator is the best for evaluating a chart?

To this, the answer is rather simple: none. While it's true that for different types of charts, different types of indicators can have more significance (such as the RSI being more suitable for ranging markets), the best method probably is taking one of each type of indicator (oscillator, moving averages, and so on) and combining them to get as complete a picture as possible about the current state of the market through the use of technical analysis.

Let’s briefly examine the four major indicator classes most often encountered in forex:

1. Oscillators

The relative strength index (RSI), or Stochastics are called oscillators because they move back and forth (oscillate) between two fixed points. In general, the forex oscillators move back and forth between overbought and oversold levels, and the signals they generate are most useful in range-bound markets. To give an example, the most popular and common of oscillators, the RSI, will give a buy signal when the indicators value is below 30, and a sell signal when the value is above 70.

Most charting software provided by forex brokers include the capability to plot all kinds of oscillators on the price. Since oscillators of the same kind can give conflicting signals, it is perhaps a good idea to use only one oscillator in evaluating a single chart. In fact, since a large part of the perceived effectiveness of technical tools is the result of their wide-spread usage by traders, it’s not advisable to use a rare, obscure technical tool, however convinced the user may be of its effectiveness.

Oscillators are leading indicators, in that they’re supposed to give advance warning of a change in the direction of the price movement. How valid the signals they give are depends on the liquidity of the market and price pattern. In an environment of poor liquidity (like Christmas week, when most people are on vacation), the signals emitted by these indicators are likely to be almost useless, because a sudden and relatively small injection of liquidity is highly likely to disrupt the oscillator’s scenario. Similarly, in a strongly trending market, the RSI can touch 70, 80, and even higher levels without the much anticipated counter-trend movement materializing.

2. Moving Averages

We have mentioned several times that the price movements on a typical day are chaotic and unpredictable. The purpose of the various kinds of moving averages is to smooth out those fluctuations, and to provide the trader with a more easily evaluated picture of the trend. Moving averages can also be said to identify trends automatically: While in drawing trend lines, the trader has to use a lot of discretion in deciding which price movement is significant and which is not — the moving average simply takes all the available data and creates the trend.

The two most usual kinds of moving averages — simple and exponential — are calculated in a similar way, but with one little difference: The simple moving average adds all the closing prices together and divides them by the number of the periods (days, hours, etc). As data is updated, the average changes (that is, moves) and the indicator is thus plotted out on our screens. In calculating the SMA, all the data from different time periods are weighted equally: Yesterday’s price is just as important as the closing price of three months ago. But in calculating EMA (exponential moving average) a simple mathematical formula grants greater value to the prices of the most recent time period, and therefore recent values are emphasized.

There are many ways of making use of these indicators. For illustration purposes we’ll consider the moving average crossover method which is often used for determining entry and exit points.

Because the EMA values the most recent periods more, and thus is more sensitive to recent price changes, the trader using the crossover method will use those occasions when the EMA makes an outsized movement in either direction in comparison the SMA as entry and exit points. That is, when the EMA moves faster than the SMA, and crosses below or under the SMA line, the trader will make an attempt at opening a position if all his other conditions (fundamental, technical) are also met.

3. Pivot Points

Pivot point are calculated by taking the average of the previous high, low, and closing prices, but as with most technical indicators, there are a lot of different ways and approaches to calculating them. Fortunately, as forex brokers provide charting services that perform these calculations in place of the trader, all we need to discuss here is how technical analysts use pivot points to predict future price movements.

Technical analysis contends that if the pivot point is broken in an upward direction, the short term signal is that a new trend is being established, or at least that a short term bullish movement is underway, and vice versa if the pivot point is broken in the opposite direction. Another usage of the pivot point that we must mention is in determining the trigger point for a new trade or limit/stop order. Since the pivot point is considered the most important support and resistance point, it can be utilized as profit taking target, or a convenient price level for a stop loss order.

Pivot points are short term indicators, and must be updated each day with the incoming data. All other things being equal, the technically-minded trader will expect the greatest price fluctuations to occur at the pivot point, and the other technical support or resistance levels are expected to be of minor significance in comparison.

4. Fibonacci

Fibonacci numbers, discovered in the 15^th century by an Italian mathematician, are numerical patterns found throughout the nature in everything from the structure of leaves to patterns of sea waves.

But we’re only concerned with this mathematical curiosity in as much as it bears on our trading experience, and that’s where we’ll need to consider the Fibonacci retracement and extension levels.

Fibonacci retracement occurs when the market reacts to a price movement in the course of a trend with a movement on the opposite side, with the size of the opposite movement defined through multiplication with the Fibonacci numbers of 0.38, 0.5 and 0.61. These levels can be drawn by the charting software offered by the broker, and the trader should only know the existence of the various levels and their significance in determining the size of the usually temporary reversals. Fibonacci extension is the opposite of retracement: During the course of a continuing trend, the size of the next leg of the trend can often be calculated by multiplying the size of the previous leg with one of the Fibonacci numbers.

The reader should not worry at all if that description sounds complicated. The best way to learn about extension and retracement is practicing on the charting software with a game or mini account offered by the broker. All that you need to keep in mind is that the size of the extension or reversal is only clear in hindsight: There’s no way of knowing which of the three Fibonacci numbers we mentioned above will determine the size of the oncoming reaction or continuation.

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Resistance and support lines are price levels which temporarily halt or reverse the continuous movement of the trend. When the trend is bearish, support lines are created where sellers are temporarily (or sometimes permanently) exhausted and cannot press the quote any lower. Conversely, during a bullish trend, the price level where buyers are checked is called a resistance line.

Studies over the years on technical analysis have confirmed resistance and support lines to be performing relatively well in their predictions. Ther are a number of reasons for this:

• Resistance and support are relatively easy to identify on charts. From the most seasoned analyst to the forex freshman, traders don’t have a lot of trouble identifying and drawing support and resistance lines. In consequence, there’s little disagreement about their location and interpretation, unlike the case with Fibonacci retracements or MACD where different starting points or different parameters can result in different results. Such is not the case with support and resistance lines, which are easier to identify and interpret.

• Support and resistance lines often receive a lot of attention from news sources like Bloomberg or CNBC. The public is led to identify a particular price as a “decisive” or “key” level, and when it acts accordingly, the significance of these levels is easily established. The influence of the financial media in raising awareness of these price points is so great that even those who have little interest or understanding of the forex market can't avoid noticing the erasure of these levels.

• Finally, support/resistance lines are not just imaginary lines drawn at the whim of the analyst. Multi-year, multi-month, multi-week support and resistance are often defended by large order clusters sometimes originating from sovereign actors (in other words, central banks or their equivalent). A few large banks such as Deutsche Bank, UBS and JPMorgan have an enormous dominance in terms of forex transaction volumes, and it’s hard to imagine a support or resistance line holding without their participation. Not only do these large firms have access to their own clients’ orders and allocations, but they also can move prices in either direction in relatively calmer markets by simply placing orders. Their orders and choices are thus noted by market participants at large, and contribute greatly to the establishment and validity of the concepts of support/resistance lines.

So what is a support or resistance line? To understand this, let us first consider how a price quote is created, as countless orders flow each day across computer screens and phone lines around the world:

When a dealer enters a buy order, the broker has the order filled by executing as many offers as possible until the amount the customer desires is reached. If the original order is a large market order, the broker will keep climbing on the price ladder until the order is fulfilled. Support and resistance points are created when the total orders in the market are not enough to clear the offers at a particular price level. When the orders are sell orders, and there are more than enough buyers at a particular price to exhaust the sellers, that price level is called a support; when there are more sellers than the buyers’ orders can clear, the price level is a resistance.

Technical analysis has an equal but different-sounding explanation of this concept. Instead of order flows and their fulfillment and exhaustion, technical analysis simply notes when a price level fails to be exceeded in either direction, and once that price is visited again, the analyst will warn of support or resistance at that level. The rationale behind this suggestion is provided by trader psychology: Since many participants expect a price level to resist or support the quote, that price level will act in the anticipated manner regardless of what the other variables suggest. In a sense, technical analysts claim that traders behave like pack animals.

During the course of an ordinary trading day it’s possible to identify innumerable support and resistance levels on charts of different time frames, and in many cases, support and resistance lines are indeed created for no other reason than that traders expect them to exist. But while this is true, how much can the rational trader benefit from this concept when it is based mostly on emotional responses?

Let us once more remember that we as human beings can only evaluate our environment through our brains. It’s always possible to predict the rational response to any event provided that one is in possession of the relevant data. But it’s far more difficult to predict the emotional response of anyone to any event, however abundant the data may be. There are countless examples of collective mania throughout history, from the Holocaust of the 20^th century to the Crusades of the 11th century and beyond. Emotions such as fear, hate or anger can cause humanity to behave in all sorts of unpredictable ways. So, on what basis can we claim to understand the mass-emotions of the markets through indicators such as the resistance and support levels?

If this is the case (and we can't really make such a claim), we’re faced with a question that we must somehow have already answered: What will be our criteria in determining which support or resistance line is trustworthy, and which one is not?

In general, traders should not try to wager a bet on the strength of any support or resistance line without the presence of data on order flows. Information on the order flows of central banks and other major financial institutions is often provided by financial news providers, and a forex broker will usually provide his client with news flow from at least one such source. As a particular support/resistance line fails to be breached a number of times, the names standing behind that line will be clearer. More importantly these large actors often have easily discernible motives behind their actions. Their behavior patterns become identifiable, and the patterns last longer than those of speculators. Consequently, their behavior is far more predictable than those of the smaller speculators.

The support of the Russian Central Bank for the Euro during the past years, for instance, was well-known to forex markets: In countless cases their appearance behind a price level was enough to sustain the market or change its direction. Many such examples can be given about the relationship of the UK’s pound with Middle Eastern central banks and their equivalents and that of the yen with Japan’s exporter-related accounts. A trader would often make a profit by siding with these actors when their presence was acknowledged. And if he didn’t know about their existence, he’d simply not take a position based on support or resistance. While some of these institutions will not be as powerful in the coming years as global trade and commodity markets cool down, the relationship between support and resistance lines and the large global financial actors will probably remain the same.

Now of course, there will be those who will rise up and rightfully attempt a rebuttal of our argument by pointing at the intra-day resistance level that failed to be breached three, four or five times, and held its own in the absence of any fundamental reason to justify its strength. And they will say, “Alright, so this resistance level was created by emotional responses, herd behavior, trader psychology, and so on, there were no large players, but what is so wrong about that? Ok, we can’t explain it, we can’t know the reasons that caused it, but we can still make a profit from that, right? So, maybe you should just shut up, and tell us how to do so.”

To this argument the response would be that the strength or weakness of the support and resistance lines that seem so clear to the person who wishes to profit from them, is only clear in hindsight: For every support line that holds four times, there are many that failed the third time. And for every resistance line that was unbroken three times, there were many that failed the second time. They all look good and profitable on the charts, but what will allow us to know which one will hold and which will fail? Since in a majority of cases the anticipated support and resistance level will fail, how are we going to decide which one will hold and which one will not?

Of course, this is not suggesting that the concepts of support and resistance are useless; quite the contrary, they have been proven to be meaningful and relevant to trading through research and experience, but we only submit that the trader look beyond the price action itself in establishing the validity of support or resistance lines.

To conclude, let us admit that no sane person of any knowledge of the forex market will deny that emotions play perhaps the greatest part in the formation of intraday and daily quotes. It is rarer that the emotional responses of traders dominate trading for months over realities, but it is by no means unheard of, or extreme. The problem on a trading method based on emotions is not in the method itself, but in the unpredictability of human emotional responses.

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Resistance and support lines are price levels which temporarily halt or reverse the continuous movement of the trend. When the trend is bearish, support lines are created where sellers are temporarily (or sometimes permanently) exhausted and cannot press the quote any lower. Conversely, during a bullish trend, the price level where buyers are checked is called a resistance line.

Studies over the years on technical analysis have confirmed resistance and support lines to be performing relatively well in their predictions. Ther are a number of reasons for this:

*

Resistance and support are relatively easy to identify on charts. From the most seasoned analyst to the forex freshman, traders don’t have a lot of trouble identifying and drawing support and resistance lines. In consequence, there’s little disagreement about their location and interpretation, unlike the case with Fibonacci retracements or MACD where different starting points or different parameters can result in different results. Such is not the case with support and resistance lines, which are easier to identify and interpret.
*

Support and resistance lines often receive a lot of attention from news sources like Bloomberg or CNBC. The public is led to identify a particular price as a “decisive” or “key” level, and when it acts accordingly, the significance of these levels is easily established. The influence of the financial media in raising awareness of these price points is so great that even those who have little interest or understanding of the forex market can't avoid noticing the erasure of these levels.
*

Finally, support/resistance lines are not just imaginary lines drawn at the whim of the analyst. Multi-year, multi-month, multi-week support and resistance are often defended by large order clusters sometimes originating from sovereign actors (in

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