All Huiyou should know one sentence: go long at the support level and short at the resistance level. No matter where you heard this sentence, or read it from a book, you will basically regard this sentence as a truth, at least I regard it as a truth. But why is this sentence used by most people as a truth? Let's talk about the formation of support and resistance levels first.
Support level: It is not so much a support level as it is an area, we can call it a support area; it is an area composed of actual or potential buying price ranges, and the amount of buying in this area is sufficient to temporarily To stop the price from falling, please pay attention here, it is a temporary stop, because any support level is used to break;
Resistance level: Same as the support level, we can call it a resistance area, which is an area formed by the actual or potential selling price range, and the selling in this area is enough to temporarily prevent the price from rising.
Simply looking at the definition of support and resistance levels, we should understand why we should go long at the support level, because it is a buying area, and short at the resistance level, because it is a selling area. This is easy to understand, but what is the logic behind it? Today I will explain this issue in detail from the perspective of "institutions".
"Old drivers" in the foreign exchange market should all know that there is a term "market depth" in this market. In fact, in my opinion, this noun expresses the price at which there is a buying order and the price at which there is a selling order. But for our ordinary retail investors, it is impossible for us to know these prices in advance, so who can know? The "agency" can know. Because the major investment institutions have a lot of money and goods, and they are also very smart, they can always buy at a low level and sell at a high level. In fact, this is the same as many traders who do business, buying a batch of goods at wholesale prices, and then selling them at retail prices. In fact, the buying price area of the institution is what we call the support level, and the selling price area is what we call the resistance level. The reaction in the diagram is as follows:
As mentioned just now, institutions have a lot of money and a lot of goods, so when they want to buy, they may not be able to buy so many goods at the same time in a price range, but they must buy in a certain price range What to do with so many goods? Then I can only wait and see who will sell at this price. As long as there is a sale, I will buy it until I buy enough goods. Similarly, institutional shipments cannot be sold out within a certain period of time, so there is also a need to wait. It is a well-known truth: when the demanded quantity of goods is greater than the existing supply in the market, the price will rise; and when the market supply is greater than the required quantity of goods, the price will fall; Once the institution "buys", the supply will be less than the demand, so the price will rise all the way, and once the institution "sells", the supply will exceed the demand, and the price will fall all the way. Let's look at another picture:
The price in the picture is falling all the way, and the support level can't stop it at all. This is because the demand in the price area of the "support level" is not as large as the supply, and it is not enough to digest so many goods, so the price is so high. Will continue to "reduce the price" to sell. But it is not difficult to find a very strange but common question, why when the price falls below the support level, why does the price rise again to the original support level and then fall again? In fact, this is the common "top-to-bottom conversion". The occurrence of this situation can be roughly explained in four points:
First, for those who are short sellers at high positions, I need to make a profit to close a part of the position. The liquidation here can be understood as I originally said that I would sell 1,000 lots of goods, but suddenly I said that I only sell 300 lots now, and the rest will not be sold. , resulting in short-term supply less than demand, leading to price increases;
Second, people who are long at a high level, because they see the price falling all the way, they want to "protect their capital" and close their positions when the price returns to the price I was long at again, which once again caused an oversupply;
Third, people who are long at a low level, because they see that the price is rising, have already made money, so they also need to realize the goods in their hands, so they will also close their positions when they reach a certain high level. Will cause oversupply;
Fourth, in order to get more profits, institutions sometimes "act" for retail investors, deliberately using some small funds to raise the price, making retail investors mistakenly think that the price is going to rise, and then chase more, after reaching a certain level , The institutions then sold a large number of goods in their hands, causing prices to fall and trapping retail investors.
The above points can basically explain the principle of top-bottom conversion, but it may seem very difficult for some people who have just entered the market or do not have a special understanding of this market. Here is another little knowledge for everyone: the foreign exchange market appears in the form of "currency pairs", such as the euro against the dollar, the pound against the dollar, and even the gold we often talk about is actually gold against the dollar; whether you are Whether you are long or short, you are actually doing a "buy" action. Here is an example of EURUSD (EURUSD): EUR is the base currency and USD is the quote currency. When you are long EURUSD, it is actually equivalent to buying (converting) the U.S. dollar into an equivalent amount of euros; when you are short EURUSD At this time, it is equivalent to buying (converting) the euro in your hand into the equivalent amount of US dollars. When you can understand this principle, go back and look at the above four points, and it should be easy to understand.
The above content is not all standard answers, and it is not comprehensive. A large part of it is what I have personally summed up over the years, but I think this kind of expression should be easier for Huiyou to understand than the standard answer in books. Because we are here to "speculate foreign exchange" rather than to study the "principle" of price movement, so I think we should learn more practical skills and experience. As for the principle of price movement, if we have time, we can understand it accordingly Take a look, but it doesn't need to focus on this aspect!
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