Forex Currency Trading Tutorial - What Causes Resistance?

On a currency chart, there are only two root causes for a change in trend direction (or a stall in current trend direction)

. These 2 reasons are strong support, and strong resistance.

When the price action in a market is rising, we call this a bull (or bullish) trend. Price is rising because there are more buyers than sellers (at that point in time) in the currency pair. Lets take as an example the AUD/USD. Price action will rise in this pair as long as the number of traders having confidence in the AUD outweighs the number of traders who have confidence in the USD. As more and more AUD gets bought, the sellers who still possess it are able to ask for a higher price.

This may also be thought of as the demand being higher than the available supply. When something is in short supply, then anybody who is in possession of the rarer item (in this case it is AUD) will be asking for continuously higher prices when they sell. Thus causing the price to rise.

However, not all trends continue indefinitely. There will come a time when cyclical market forces come to bear on the price, and the end of the up-cycle arrives. What causes this (often) sudden stop, or reversal?

The underlying reason (using our above example again) is that the sellers have increased the price of AUD to such a level that the buyers are simply not prepared to pay any more. The buyers appetite (as a group) for AUD begins to wane, and they stop buying. The price stops increasing as a result.

At this point two things may start to happen. Sellers notice that the buyers are not buying anymore, and owners of AUD (that bought it lower down while the trend was still rising) decide to sell it in order to take their profit.

The net result is that the upward moving price can come to a sudden halt, and become a downtrend instead. The sellers of AUD need to decrease their prices in order to attract buyers interest once again. The price met with "resistance".

So a level of resistance at any price level is caused when the majority of buyers (causing the bull trend) suddenly encounters a LARGER majority of sellers.

It is not always possible to see in advance where all of these levels of resistance may be on a chart. Some of the most common places are at very round numbers (like 1.5000), at a downward trend line, at a previous level of strong support or resistance, at a recognized Fibonacci level, etc. Predicting where the resistance levels may be is a critical skill that you will develop as a currency trader.

by: Candice McInnes

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