Lesson 3 – Technical Analysis 2

Written on 9 November 2008 by Rod

Types of Markets

There are basically 2 types of markets depending on their behaviour. Each one should have it’s own strategy:

Range Bound Market

Trending Market

Two Basic Concepts

There are 2 basic concepts that can be applied in any of the above mentioned markets.

Support and Resistance

Support can be defined as the “floor” or bottom level through which the currency pair has trouble falling below.

Resistance, is the opposite: the “ceiling” or upper boundary through which a currency pair has trouble breaking above.

So here are shown Support and Resistance levels on Rangebound and Trending Market:

Range Bound Market

So the strategy that should be applied to a rangebound market in it’s most simple way is: Buy at support levels and Sell at resistance levles…Wait not so fast…

It is important to mention that in average, markets are rangebound around 80% of the time. This is why it’s so important to have a rangebound strategy in your arsenal.

Trending Market

The strategy that should be applied to a tranding market is sort of the opposite way around: Buy above resistance levels and Sell bellow support levels.

It is also important to say that in a DownTrending Market Resistance Levels are more important while in an UpTrending market, Support levels are more important.

There is no exact formula for drawing support and resistance lines. Some traders prefer to connect only the bodies of the candles and to exclude the high and low points outside of the open and close while other do not. The thing here is that if the line does not look valid to you, chances are it is not relevant, because other traders are using the same charts.

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