Hi Everybody!
I would like to discuss the use of Barriers in trading. These barriers are known as Support and Resistance. I use the word barriers because a support can turn into a resistance and vice versa. The important thing to know is that there is a barrier in place. They can help in opening and closing a trade. We will discuss how to locate them and how to use them in your trading. Stronger barriers are usually broken during important market news and events. The candlestick must close beyond the barrier to consider it broken.
How to find barriers:
There are several ways to locate barriers. No matter what method you are using, when you look at a chart, it is a good idea to start from a long term time scale and make your way to shorter time scales or the scale you are looking for. Doing this, you can mark barriers as you see them. A barrier can be located when the price has difficulty breaking through a particular price several times throughout its movement. As you make your way to a lower time scale, you will likely see previous barriers that affect shorter time scales as well. See the example below:
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Another method is using the Fibonacci analysis.
The Fibonacci theory explains that everything has natural levels using the Golden Ratio for example a snail shell. This will show you the natural barriers present in each graph according to the Fibonacci Analysis. These levels are created by drawing the Finacci Retracement between the two end points. The key Fibonacci ratios are 0%, 38.2%, 50%, 61.8% and 100%. Overlapping lines, are seen as stronger barriers while the key ratios are the “natural” barriers.
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Why they are important and how to use them in trading.
When we see these barriers, we understand first that the market has difficulty breaking them.
For example, this means it will be difficult the open a BUY trade with a barrier 10 pips above our open price. Accordingly, it is expected to rebound off of it and go against the position.
Likewise, we can use the barrier to make a trade. Using the same example, to open the trade as a SELL position with the expectation that it will rebound and this time go with the position. Here we can also use a smaller Stop Loss to reduce the risk. The amount of the Stop Loss depends on which time scale you are using. The bigger the time scale, the bigger the Stop Loss will be.
In the example below, you can see how the two barriers played a very important role. At the support (lower barrier), a trade could have been opened with the expectation to reach the upper barrier (the resistance).
As you can see below, again on an hour chart several hours later, we see that the price hit the barrier (at about 1.2920) on its way up, fell back down to the other barrier(about 1.2900) and again proceeded upward to the “1.2920″ barrier having difficulty in that area.
I hope this is useful to you and I would enjoy answering any questions or feedback you have!
I look forward to your feedback,
Social Investment Specialist
Disclaimer The analysis we provide is based on the average estimate of price movements in one day. Does not guarantee what we deliver is actually a proper and correct. Everything that happens in the decisions you make on your trading transaction is to be Your responsibilities.
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