How Support Becomes Resistance?

Market can be trending,it can be ranging or it can be consolidating. Trend can be highly profitable. In currency markets, trend once started can last for years. But the truth is most of the time, the market is not trending. It is only ranging. This can be something like more than 70% of the time. So most of the time, you will be doing range trading.

Support is the level when buyers start buying considering the price to be low and attractive. Resistance is the price level when sellers start to sell thinking that the price has become too high and it would be dangerous to continue holding the position. If support and resistance were to hold forever, this would make trading an easy game. We would be trading easily as price ping pongs between two levels. This would make trading indeed very simple. But this is a wishful thinking.

Now let's consider what happens when support breaks. Suppose that a support level has withstood for quite some time. What this means is that the price action has fallen to this level a number of times and then bounced back. The reason for the price bouncing back from this level repeatedly is that there are buyers who are ready to buy repeatedly at this level. These buyers could be institutional traders and even individual traders.

Now, price bounces back and forth between these two levels, traders get conditioned by the market. They buy at the support and sell at the resistance. But suddenly one day they find that the support has been broken. Savvy traders always trade with a stop loss. In this case, their stop should be a little below the support. This way if the support does not holds, they are out of the market. But sometimes some traders are not that savvy. They take the risk of trading without a stop loss. When the support is broken, they get in deep trouble if they don't act quickly.

So they quickly close their positions to stop the losses from mounting. If too many traders sell at this level, this makes the former support into the new resistance. This is how support becomes resistance.

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About the Author:
Mr. Ahmad Hassam has done Masters from Harvard. Learn Fibonacci Retracement Method that pulls 500+ pips per trade FREE! Read thes story of Richard Samuels, a post office mailman with a head injury and how he made a fortune with these Neutrino Forex Signals!

Article Originally Published On: http://www.articlesnatch.com

Tags: support and resistance , support and resistance trading , range trading , trading support and resistance , support and resistance levels

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