Dancing with the Lines

Testing and Teasing


Jul.19.2013

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The support and resistance levels are lines we draw at the level where we think the end of a trend is going to be. The end of an uptrend is the resistance. The end of a downtrend is the support. However, sometimes the naughty currency pairs merely test (tease) the support or resistance line to see if they can get past that level and continue riding on the trend. You may get all excited when you see this and think that the market is continuing to ride on the trend, but then the pair goes back to the other side of the level, and Mr. and Ms. Whatever-Currency-Pair put their hands behind their ears and stick out their tongues, pointing and laughing at you and making you realize that it was a mere tease.

<TX>This is called testing a support or resistance level. In candlestick charts, these tests are mostly done by the shadows (the wicks) of the candles, as in Figure 11-7. They keep attempting to break the level, but the prices close inside it. When this happens, we say that the support or resistance held, and it indicates that the market trend has changed.

Danial Fig11 07

Currency Pair Testing a Support Level

As you can see in Figure 11-7, the lower shadows of the candles are breaking the support level, but the prices ultimately close above the support level. The support level supported the falling prices.

Metaphorical Example

Let’s say you have been watching Ms. U.S. and Mr. Japan dancing the tango on the dance floor. They keep moving back and forth, moving up and down, going in circle, going in zigzags, and so on. Then you notice that there are certain lines on the dance floor that they haven’t crossed on the dance floor. Every time the two of them get close to those lines, they pull back immediately. So you start to think that maybe those lines indicate a forbidden area that they are not supposed to dance on. As you are talking about this with your gal pal, you both draw an imaginary line and bet that it separates the dance floor from the forbidden area. Sometimes the two of them get really close to that line, and maybe they even extend their legs over it (see Figure below)! But after a teasing pause with their legs extended, they go back inside.

Danial-Fig11-08

                                                                                       A Pair "Testing" a Barrier

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