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Range Trading Secrets- How Support Becomes Resistance?

Market can be trending,it can be ranging or it can be consolidating. Trend can be highly profitable. In currency markets, trend once started can last for years. But the truth is most of the time, the market is not trending. It is only ranging. This can be something like more than 70% of the time. So most of the time, you will be doing range trading.

Support is the level when buyers start buying considering the price to be low and attractive. Resistance is the price level when sellers start to sell thinking that the price has become too high and it would be dangerous to continue holding the position. If support and resistance were to hold forever, this would make trading an easy game. We would be trading easily as price ping pongs between two levels. This would make trading indeed very simple. But this is a wishful thinking.

Now let's consider what happens when support breaks. Suppose that a support level has withstood for quite some time. What this means is that the price action has fallen to this level a number of times and then bounced back. The reason for the price bouncing back from this level repeatedly is that there are buyers who are ready to buy repeatedly at this level. These buyers could be institutional traders and even individual traders.

Now, what this means is that these traders have been rewarded a number of times when they entered into a long position on the support level a number of times. So they are doing it repeatedly. In other words, the market is rewarding them repeatedly and they have been conditioned by it. But when one day when the price breaks through the support, most these traders find their stop loss tripped. This way they are out of the market when the market did not bounce back from the support as their stops are placed just underneath the support level. But some traders who have been over optimistic about the support and didn't place any stop loss will experience moments of anxiety.

So these traders are going to bail themselves out of their losing positions. If enough selling takes place at the area of former support, the price action will reverse itself and start falling. This way support turns into resistance. In the same way resistance can become support when the price action breaks the resistance that had held of a number of times but is broken through.

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