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.