How to trade historical highs and lows?

Introduction

Typically, when we set support or resistance levels, we look for previous lows or highs to do so. For example, in the H4 chart below, the GBP/USD pair has been circling around the 1.3 level for quite some time, so it would make sense to choose this level as tactical support. Very convenient, right? Basically, you are trading on the past performance of the asset.

What if

But what if the currency pair reaches an area where it has never been before, uncharted territory? This is the case of the USD/TRY pair on the daily chart below. While support at 7.50 and resistance at 8.50 are easily established, that could only work for local intraday trading, and only as long as the pair remains below that resistance at 8.50. But what happens when it rises back to 8.50 and surpasses it? How are resistance levels established?

Assumption

The first thing to review is a longer temporality. Sometimes you simply don’t see price performance far enough in the past – a multi-year low or high is barely visible on an H4 or daily chart. Therefore, you should switch to a weekly or monthly schedule. But for the USD/TRY pair, the monthly chart below shows that in the last twenty years, the price has never gone this high. What to do then and how to set the level
of resistance here?

Projection

Basics: ready

What you should do is make a projection of the graph. But before doing so, make sure that no changes are expected in the fundamental design of your asset. It’s like planning a sea route: you got to where you are by following a certain current. If the wind changes, the current changes too, that will take you in a completely different direction that you can’t plan for. Therefore, you can only predict your future position by assuming that the winds continue to blow in the same direction as has been the case until now.

Rhythm: ready

Now, look at the speed at which your asset has continued its trajectory. You can’t really foresee accelerations or decelerations, so your only way to project price movement in the medium and long term future is to assume that they maintain the same pace, on average. Once you do that, you will have the expected price movement graph plotted on your screen, which can now be used to establish appropriate support or resistance levels. Objective completed.

Practice: ready

For example, the daily chart of the USD/TRY pair below. We take its upward trajectory marked in the box on the left side as a basis for extrapolation. That is its normal behavior without important news or big movements in the market. Now, we assume that it will follow a similar trajectory in the foreseeable medium-term future. When we graph it, it doesn’t have to be identical: we only make an approximation of what is the most possible scenario for USD/TRY, under the same fundamental conditions. The hypothetical chart we get suggests that in about three months, USD/TRY could reach 9.00 from 7.50 just as it went from 7.00 to 8.50 in August-October. Congratulations! Now, we can set the resistance at 9.00 and base our trading plans accordingly. The same would work with downward movements.

Reality: ready

Keep in mind that this approach is more applicable for medium and long-term projections. Short-term intraday moves are much more distorted by temporary market emotions, while the long-term play ignores that noise. Also, keep in mind that you will need to include corrections and approximate setbacks in your projection. Otherwise, you could end up having an ideal scenario or smooth straight curves that lead to unrealistic expectations of price behavior.

Conclusion

So, when you have all-time highs or lows surpassed and no benchmark on the asset’s past performance appears to be valid, follow these guidelines:
1.Review the fundamental design. If the fundamentals are expected to remain the same for the foreseeable future, that could be enough ground to assume that the current trajectory of the movement can be projected over the medium-term horizon.
2.Check the movement pattern and speed of the asset. Look at how steep the slope is, how crossed it is by local distortions and corrections, and extrapolate it to the medium-term future.
3.Based on this projection, observe the support/resistance levels or zones. Now, your goal is completed and you can trade the expected levels.