Monday, August 26, 2013

Support and resistance in the EURo versus USDollar pair (EURUSD)

To understand support and resistance is to understand where price has reversed previously and that the current price might coincide with levels that have been shown, by experience, to be significant.

Consider the weekly chart of EURUSD (above) as it stands this morning. There are a number of things to note about the current level, which is very close to 1.40.

The following apply:

  1. Price has reversed here, or close to here, relatively recently and at other times in the past (sometimes when rising, but also when falling): CHECK
  2. 1.40 is a nice, round number: CHECK
  3. Current price coincides with the 200 period Simple Moving Average (SMA): CHECK
  4. Price could be forming a channel (between 1.28 and 1.40): CHECK
  5. A Pinbar formed on the 4 hr. chart yesterday. This is often the precursor of a reversal, particularly when it coincides with other indicators, such as those listed above.
So this might be a good place to consider a short trade. There is only one other consideration: Will price momentum indicate that a useful move is afoot? The Silver Trigger algorithmic routine will determine that. We have set it to initiate a trade, but only to the downside, if momentum reaches 0.18 on the Omicron FX scale of momentum. This is a dimensionless number, in the same way that the Richter scale for describing the magnitude of an earthquake is a dimensionless number. This is because it is defined as the logarithm of the ratio of the amplitude of waves measured by a seismograph to an arbitrary small amplitude (the amplitude dimensions cancel each other out).

As always, the value of this means of deciding on a trade lies in the fact that these indications are watched by a large number of other traders throughout the world. They therefore constitute something of a self-fulfilling prophecy. As we are dealing in probabilities, there is also the prospect that any one trade may, simply, not work. Just make sure your risk control and money management arrangements are in place.

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