Turning Points: How to Recognize and Use Them.

Hi friend!

We have already managed to talk about many things. You’ve learned a lot, congratulations! Glad to see you here again!

This time we will not talk about complex indicators but will learn about the instrument that will make you look like a trading guru for an ordinary person. This effective method will also improve the understanding of the market. It not only won't lose its relevance even in the most complex strategy but also will become its decoration.

So, what are turning points?

The market moves up and down. It periodically reaches different price levels, and after that, it turns around and goes in the opposite direction. The most interesting here is the fact that usually, such “turning point" prices are the same! At the first view, the situations in Picture 1 and Picture 2 look amazing and magical, but we are sure that there isn’t any magic there.

Picture 1. Support and resistance lines on the EUR/USD chart.

As can be seen in Pictures 1 and 2, the red lines reflect the resistance line or the upper line, and the green lines reflect the support line or the lower line, from which the price bounces, as if from an invisible wall. And the points where the price touches these lines or stays in the immediate vicinity of them are called turning points.

Picture 2. Support and resistance lines on the GBP/JPY chart

As you can see, support and resistance refer to a specific trend movement. Not only side movement, but also a directional one, which is better expressed in Picture 3. Even in the period of directional movement, you can see that the price does not move in a straight line. It fluctuates inside the support and resistance lines. It forms a price channel.

Picture 3. Support and resistance lines that form the price channel on USD/CAD.

It means that the borders of the price channel are the turning points of the trend and the maximum values ​​of the expected correction (the previous rebound from the opposite line).

What is the reason for such price behavior?

It seems that this pattern is simple enough to become famous and lose relevance. However, the support and resistance lines are more fundamental and reasonable than the illusory combination of circumstances. So, this pattern is based on the opinion that a price expresses all the information about an asset, all views of all traders. With such a reflection, we can say that the basis of the currency market is formed by transnational corporations, commercial and central banks. It means that most of the volume is formed in the hands of big traders, who have better and relevant information about asset prices, or who directly determine their value.

So it turns out that support and resistance lines are specific barriers for the value of a currency. At higher or lower prices the currency instantly becomes too expensive or too cheap, which causes an instant reaction of large traders, leading to buy or sell. So, we can see that for the currency market, support and resistance lines are an objective benchmark.

In this article, we studied what prerequisites are used to determine turning points and proved them in terms of suitability for trading. In the next article, we will learn how to trade using straight lines.