Support & Resistance As Emotional levels
Though there are many forex traders out there that rely on advanced market predicting (or prediction-attempting) tools such as algorithms, neural nets, or even just a Metatrader Expert Advisor, one of the oldest forms of market analysis called support and resistance lines still holds its ground amongst more complicated forms.
Plainly put, a support or resistance line is a specific price level or exchange rate level where the market has approached this level and then retraced in the opposite direction. A support line will be on the bottom, and a resistance line will be on the top.
But in order to understand why this old-school analysis method is still so effective, you must understand what causes the forex market to move in the first place. People cause the market to move. The market itself consists of nothing more than all of those people, sitting at their communications-enabled computers and logging on to centrally-located servers in order to access their online trading accounts.
People of all sizes make up this market. At the largest end of the spectrum you have Central Banks, multi-national banks, and large investment and hedge funds. In the middle there are intermediate-size banks and investment funds, as well as international corporations and companies that either make currency exchanges in order to deal with the native currency of a country they are operating in, or they want to hedge against the risks posed by exchange rate fluctuation. Note that the activities by the companies and corporations are not speculative in nature, but are rather a side effect of doing business across different countries.