Support and resistance levels form when a number of orders cluster at one point on the chart, and this is particularly true when a large institutional trader, such as a hedge fund or currency manager, is entering the forex trading market with a massive order.

If the institutional trader entered such a large order all at once, the currency pair’s resulting movement would work against the trade, e.g., a large buy order would force up the price even as the order was being filled, making the second half of the order less profitable than the first. Similarly, of course, a large sell order forces down the price.

Rather than working against her own trade, the institutional trader will instead enter such a large order in sections. The first section of a buy order will force up the price, and the institutional trader will then wait for the price to fall back to her entry point before submitting subsequent sections for fulfillment. In this manner, the institutional trader enters a massive order entirely at or near her target price. More importantly for the retail trader, a support level is formed and defended repeatedly, signalling to other traders that the price may not be allowed to fall below that level.

In the illustration below, the USD/CAD on the five-minute chart repeatedly hits and spikes through a support level between 1.0595 (the lime green line) and 1.0600 (the yellow one). This is perhaps an institutional investor entering a large order in sections:

There are two additional and interesting points to note about this support level: firstly, it was formerly a resistance level although not well defined; and secondly, it’s also remarkably near the 200-period moving average, the grey line slanting downward from the left to the right on the chart. Not only does the MA-200 reinforce the level of support, but also when the price crosses and remains above that level, it indicates that, on this time-period chart at least, the trend has turned bullish.

Many times such support and resistance entry and exit levels cluster at round numbers, which are important psychologically. In the illustration above, although the true support level is 1.0595, it’s unlikely the institutional trader is aiming at such a number; rather, she’s more likely entering the market when the price falls beneath 1.0600, and 1.0595 is merely the level she’s hitting.

Another good indicator for this trading method is a Fibonacci retracement. Below is the 15-minute USD/CAD chart for roughly the same time period, with a retracement drawn from the most recent reaction high at 1.0657 to the most recent reaction low at 1.0548:

Translating this back into the five-minute chart, below, illustrates how the 50% retracement level (the pale yellow line very near the grey MA-200) reinforces the other support levels. Also note how the latest heikin ashi candle in this series shows a sharp rebound from the 1.0605 level, as if the institutional trader, after several indecisive doji formed, wasn’t certain the price would fall as far back down as 1.0600:

Retail forex traders who learn to interpret such chart movements can ride on the coattails of large institutional investors and collect easy pips.