What is the most precise way to draw support and resistance lines for forex trading?
Support and resistance is a real concept, because humans keep in mind the price they paid for something, and reference to that. It’s a quirk in human nature which drives inefficiency in the market.
So if a Stock/Currency/Commodity sits at a given price for a while, many trades are done at that price, then goes up. If price falls to the original price, it looks like good “value” at that level.
There is validity in the concept. But the way it is applied by snake oil salesman is to draw very exact lines and say “this is going to happen”, “this resistance will hold”, etc. Twaddle!
If the market wants to go down because there are more sellers than buyers, it all becomes quite irrelevant.
Bottom line, resistance/support holds sometimes but not others. It depends on:
- the volatility level
- whether the market is trending
- whether the support is holding in the with-trend or counter-trend direction
And then on top of that there is a huge element of randomness and noise.
Bottom line: Don’t be too precise with your support resistance lines. They are only a rough guess anyway, they only work where it is really obvious, and they only work just over half the time.