Support and Resistance in Momentum Markets

Another way to use support and resistance is to trade outside of the range; in other words, to anticipate a breakout. This involves placing orders to buy above resistance and to sell below support. The rationale is that the market will gain momentum once it breaks out of the range, and thus by placing orders just below/above support/resistance, traders will be able to make big gains when the market moves out of the range. Momentum trading is a bit counter-intuitive, as it involves buying at a higher price and selling at a lower price.

Below is a chart that illustrates the concept of momentum trading. Note how the pair accelerates once it breaks out of a narrow range:

Support and Resistance Zones

Because technical analysis is not an exact science, it is sometimes useful to create support and resistance zones. Each pair has its own characteristics and the analysis should reflect the intricacies of the pair. Sometimes exact support and resistance levels are best and sometimes zones work better. Generally, the tighter the range, the more exact the level. If the trading range spans less than 2 months and the price range is relatively tight, then more exact support and resistance levels are probably best suited. If a trading range spans many months and the price range is relatively large, then it is probably best to use support and resistance zones. These are only meant as general guidelines and each trading range should be judged on its own merits.