The importance of support and resistance can never be overstated in technical trading. Most traders know this and use support and resistance for entry, stop and target points. It does however have a less glamorous side and can often become downright annoying.
From Ryan Scholfield at Trade with Precision:
The importance of support and resistance can never be overstated in technical trading. Most traders know this and use support and resistance for entry, stop and target points. It does however have a less glamorous side and can often become downright annoying. You see, when support and resistance holds a market to ransom, as it is in many markets right now, it can stifle good trends by creating a barrier that can prove too hard to break.
Let me show you what I mean via some recent examples. Take silver. For weeks silver has been trading between $20 and $16.60 (roughly) which hasn’t allowed a good up or down trend to take place. Sure there have been trading opportunities on the lower time frame trends, but, if you like to trade the higher time frames or trade with daily trend direction then silver will have been off limits due to the failure to break either level.
Next, let us have a look at the Japan 225. Again the market has been held to ransom between support and resistance. The upper level of 17,000 and lower level of 16,330 (roughly) has halted any clear daily trend from breaking out and taking place which means, like silver, trading the lower time frames has been the only option.
The next I wish to show you is on EUR/JPY which is slightly different. It is slightly different because there is technically a daily down trend in the sense that there is a clear series of lower lows and lower high’s in the recent push lower. The one spanner in the works is that there is support at 112.30. Why does this concern me you ask? Well the simple fact that there is support close to where price currently is means there is a probability that price will react to the support by bouncing. It may not react with it at all and could just break lower but I focus on trading high probability trades only, and by having a support level so close reduces this probability somewhat.
Again we see the same in GBP/USD. There is a daily down trend but what is to say we won’t just see a bounce off this level like we have in the past? Due to this I would be very careful trading GBP/USD at the moment.
All of the levels spoken of in this post can turn from a level of annoyance into one of wonderful opportunity! I will be watching these levels very closely over the coming days to see how price reacts. It is still true that I use support and resistance for my trading decisions so should one of these markets break out and pull back to one of these levels, then I will be ready to take action and trade. Until then, I will wait and be patient whilst I shake my head in mild annoyance at the great trends being stifled!