The Currency Pairs Trade

Turn on your real time or historical forex chart, do you see regular jig-jag patterns? Great, that means your charting software isn’t malfunctioning, in fact it’s working perfectly fine! Switch any currency pairs and you’ll see the same thing. As the price changes from period to period this is what happens: Support and Resistance. But what are they really?

One way to think of this kind of price movement is in terms of supply and demand. As we all know, as demand increases, price increases. For the purposes of our forex technical analysis, imagine that you are trading the EUR-USD currency pair. Assume that the price is $1.50US. Now consider the following scenario.

First Factor Affecting The Currency Pair – Support

Assume that the EUR-USD currency pair went to $1.49US. At this lower price there would be more potential buyers-that is, increased demand. But there would also be fewer sellers. This is the result of some sellers exiting the market as a result of their sale and a reluctance by other Euro holders to part with their supply at this price. But in order for the price to continue to fall, supply of Euros at this level must be greater than the demand.

Lets assume that this is the case and the price continues to fall. At $1.48US, there would be even more demand for the EUR-USD currency pair as more and more traders are drawn to the trade. But this would also eliminate some sellers.

At some point traders holding Euros would simply have had enough. They would stop supplying Euros at these lower prices. This would stop the fall in the price of the EUR-USD currency pair. In terms of forex technical analysis, this point would be known as a support. This is a point where any further decline is unlikely and and the next move would be to the upside.

The Other Main Factor Which Affects The Currency Pair – Resistance

And this is what will happen. With little or no supply of Euros at the support price, the price of the EUR-USD currency pair would begin to rise. This will bring more sellers into the market as the price of the EUR-USD currency pair retraced its path towards the $1.50US mark.

In order for the price to continue to rise, the demand for Euros at this level must be greater than the supply. As the price goes higher, there will be fewer and fewer buyers at each PIP-meaning lower demand. At some point the price will be so high that there will be little or no demand for the pair in the market. In forex technical analysis, this point is called resistance.

And over the course of a trading day, this cycle will repeat itself hundreds of times. With prices dropping until there are no more traders willing to sell. Then increasing until there are no more traders willing to buy.

The key to understanding forex technical analysis is the knowledge that the price of a currency pair like the EUR-USD does not go up or down in a straight line. Its knowing that in both an uptrend and a downtrend the price will find both resistance and support. And that profits can be made if you are confident in the trend of the currency pair or can identify when either will fail to appear using your forex technical analysis.