Technical analysis mantra “the more significant the support resistance level the stronger it is”
A few days ago I pinned this chart on our currency trading board in Pinterest and made this comment “B4 we get excited abt $USDJPY, recite this mantra ‘the more significant the lvl, stronger it is‘. But we cannot underestimate #QE #abenomics“. Looks like it has caused on confusion. Now for some clarification.
USDJPY monthly chart 1991-2013
Technical analysis works on probabilities but there are “rules” to follow
A particular rule says that the more significant a level is, the stronger it becomes. Levels that fall under this rule includes horizontal support resistance, trendlines, fibonacci retracement levels. Chart patterns do not fall into a ‘level’ category but comply to this rule.
When a trader encounters support resistance levels, it does not mean that each level is good. Some levels are stronger than others. In order to tell which level price might be more likely to react to, one way is to determine by significance. There are some guidelines to apply this:
- The more obvious a level is so that ‘I see it, you see it and many sees it’, the more followers it has.
- Levels on higher time frame are stronger than those on lower timeframe.
- The longer duration that the level holds, the stronger it is.
- The more times the level has been tested or validated (by price encountering the support resistance and turning away), the more meaningful it is.
- Traders should assume that a level will hold until it is broken.
- When a significant level breaks, the outcome is a bigger move.
Case study of USDJPY
USDJPY has been rallying because of ‘Abenomics’. As a result many traders in our community made money going long USDJPY from around 99.30 and riding across the 100.00 exchange rate threshold.
There was so much excitement that I pinned this chart to Pinterest and then tweeted it out in order to serve as a reminder before they got carried away. There is this 14-year old support resistance level at around 101.60. Is it significant? Yes it is significant and long term investors and ‘big boys’ will be paying attention to it. Does it mean price will stop immediately? No but it better be taken into consideration inside trading plans. Today I was vindicated.
Price action today shows USDJPY respecting that support resistance
How to read this support resistance for USDJPY?
- The 14-year-old line is now a strong resistance level for USDJPY.
- A strong level there does not mean USDJPY will reverse immediately.
- It does not mean traders should turn short.
- It does not mean traders should not go long.
- It is likely that the level will stay there until it is decisively broken.
- Short term traders can use it has an exit level.
- Anyone targeting any level on the North of the line should not expect it to happen soon.
- Some consolidation with retracement may happen here but it is not bearish reversal.
- Any person who firmly believes that USDJPY should be bearish based on other input should still wait to see if the level will stay intact and if a bearish reversal will form before taking action.
- Just be ready for some volatility.
Rounding it up
Finally there are 2 tips in this post ‘How to determine strong support resistance in forex trading?‘
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."