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The Market's Memory: Recognizing Support and Resistance Levels in Forex Trading

The currency market holds a strong memory, evident from the support and resistance levels that form. This can be clearly observed. The market does not forget, especially during significant movements. How many times have you observed prices retracing to initial levels after a correction? Sometimes, prices sustain around these levels before continuing their movement or reversing direction. These patterns often repeat in the history of each currency pair's movement. Understanding why this happens can make it easier to anticipate market movements.

Forex trading involves probabilities, not certainties. However, the market always remembers every significant movement. While this may not always hold true, it can be a strong assumption. Bar formations (candlesticks) or price action patterns are tangible evidence of this high probability. Price action provides signals about the next movement direction. The combination of assumptions and price action can offer clear indications of price movements and high-probability trading signals.

For example, on the daily chart of the DAX30 stock index (Germany), it's evident that key resistance levels formed between 9735.00 and 9700.00. The area between these key resistance levels and significant price movement is termed the 'event area'. Trading signals not only occur at key levels but also within the event area. A pin bar reversal formed within the event area can signal a sell. The same occurs after several days, indicating that the market does not forget the formed key levels and event areas.

Utilizing event areas as the market's 'memory' can be preceded by specific price action formations, such as pin bars, or without price action formations as entry triggers. For instance, in the EUR/USD currency pair, it's noticeable that the first pin bar forms an event area associated with a strong price decline. The area near this pin bar becomes a significant area that will react to subsequent tests. The second pin bar that clearly forms indicates a buy signal. The market always remembers levels within these event areas as significant in determining price movement directions.

The market never forgets support and resistance levels, especially those tested multiple times. The stronger the level, the more the market remembers it. The market will always react strongly or consolidate around the event area before determining the next movement direction. An example on the XAU/USD chart demonstrates how a broken resistance level subsequently becomes a key support level. The market always tests these levels before determining the next movement direction.

To anticipate the key levels remembered by the market, you need to understand significant support and resistance levels and observe the formation of event areas. Consequently, you can be more vigilant whenever prices approach these levels. The market has a strong memory of significant event areas.


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