Little did I know when I was asked about Support and Resistance lines that I would have the chart, readily supplied today.

I’m a fan of support and resistance lines coz I’m a simple bloke and these are straightforward lines, not long winded mathematical equations. Do they work all the time? Nope, but neither does anything else. There is no Holy Grail, but these lines are a great starting point.

OK, an official definition first then an explanation: Support and Resistance lines are points on a chart where the probabilities favour a halt, or even a reversal, in the prevailing trend.

Do What? I make only a small apology for using words like ‘probabilities’, because that’s the bottom line of trading. It’s hard to get any legal certainties in trading so we try to use different methods to get the best odds. Right, down to business, I’ll use the chart as a working example.

Starting on the 17th July £$ rose to $2.0470, the print’s small so you’ll have to trust me on that. For a while this level provided minor resistance as the currency failed to break that level until 11.30 at night, during Far Eastern trading. Notice the sharp rise once it broke through, accelerating up towards $2.0550, where we assume it stopped because sellers outweighed buyers.

Yes, I know, for every seller there must be a buyer, but the buyers were no longer interested at that level.

So, $2.0550 is our resistance line, the point at which the buying dried up, but at the moment it’s not that bigger deal. If this were football it would have the significance of, say, West Ham. During the morning of the 18th Sterling fell back, but look at where it stopped-ignore the brief dangly bit and it stopped at our previous resistance level of $2.0470. At this level traders who failed to buy it before or who sold it at the higher levels have seen the potential for further gains and buy £$.

Now this bit is important enough to write in italics: Our line that used to be resistance is now a support line, probably with a football rating of Aston Villa.

Once more the price rose and where did it stop? Yep, a pint of Guinness to the guy in the corner, it stopped at our resistance line of $2.0550. At this level traders took profits because it made them money last time and this was enough to halt the rise and eventually send Sterling lower again. Our resistance level now has a sort of Tottenham rating. No prizes this time for where Sterling bottomed out; this also increased the significance of the support level.

Moving swiftly onwards to the afternoon of the 20th our resistance line is broken-with attitude. Once the price broke through resistance it triggered traders’ stop losses placed just the other side of the line pushing Sterling higher.

Fast forward to yesterday morning when the force of the Sterling sell-off took it straight through our resistance line (which should have acted as support), barely stopping to wipe its feet. But look, when traders tried to rally Sterling it couldn’t get through the previous resistance level at $2.0550 and, after the second failure overnight, traders decided to flip over and test the downside to £$.

Which brings us neatly to the present. At the first attempt, around about 9 o’clock, traders failed to get £$ through our $2.0470 support, which briefly assumed Arsenal status, but when it broke at the second attempt notice the instant reaction. Stops placed just below that level were triggered and Sterling plunged 40 pips in 5 minutes. Did I trade? Nope, the irony was that I was so busy typing this that I missed the initial break and after that I wanted to wait for a rally to re-test the $2.0470 level.

There was good news though (and this happened after I took the above chart so it’s worth going in and having a look at the update). Sterling did rally to just below our line, and when it failed to break back above after weaker Durable Goods figures I sold at £$2.0457, closing soon after at $2.0447. I took a total of 60 pips on the trade, being stopped out at breakeven on my remaining £2.

There’s more on S & R lines but that’s more than enough for today.

Happy Trading