Every price action trader will know the significance of being aware of recent price highs and lows. Whether this is the previous daily high and low of a currency pair, or a swing high and low following a trending move on a price chart. The importance of being aware of these levels is that they offer traders a good insight in to where short-term areas of support and resistance may exist. These areas can then be used both to look for high-probability trade set-ups and to avoid trading in to a congested area of limit orders.
Using the daily high and low to trade
The previous daily high and low mark the extremes that price reached during that day and show forex traders where the market considered the bottom and top of trading for that day. This is important not only as a psychological level for the next day but they are also used in the calculation of daily pivot points. These pivot points provide traders with a daily map of areas of potential support and resistance and for many price action traders they identify the zones where the market is likely to reverse.
The previous daily high and low can also be used by traders as reliable levels of support and resistance in their own right. Looking at any intra-day price chart it is clear that once price breaks through this previous level, it very often converts in to a reliable area of support or resistance. These are made even more significant when they occur near to round numbers of psychologically-important areas.
Using Fibonacci with recent highs and lows
One of the things that all forex charts have in common is that they contain short-term trends. This can be seen across all timeframes as price moves higher and lower to create either upward or downward trends in price. These trends, however, do not last forever and they reach a high or low before retracing. Forex traders can take advantage of these ‘retracements’ by applying Fibonacci levels to the swing high and swing low of any visible trend. These then provide a highly reliable set of support and resistance levels based on the perceived ‘natural’ order that markets follow. This occurs through the application of the Fibonacci ratio to the distance between the trends swing high and low.
Whether Fibonacci ratios actually exist naturally in forex markets is open to debate, however, these level are highly significant because a very large number of traders use these to place their orders. It is therefore very common for price to stall and reverse during a retracement at these Fibonacci levels. Of these, those which can be considered the most effective are the 23.6, 38.2 and 61.8 percentage retracement levels of the recent swing high and low points of a trend. Whilst these levels should not be used as trading signals on their own, they can act as an excellent complement to both price action and technical traders looking for confirmation of an area of significant support or resistance.
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