Trading Forex Using Support and Resistance

We have so far learned that support and resistance are important concepts in Forex analysis. To succeed in Forex trading, these two concepts must be right at your fingertips.

Generally, we have said that support is a dip while resistance is a boom. We have also learned that a sell option can be executed when the support has been broken, while a buy position is taken when resistance has been broken.

In this lesson, we will look at two ways of trading Forex: bounce and break.

The Bounce

Woo-hoo!!! Baby Kutku is feeling bouncy today…

When you are excited at the end of a good business day you walk home bouncing like Kutku.

In forex, one way of trading is to buy or sell a currency just after the bounce. You want to take advantage of the market when it is still Yippeeeeeeeeeeeeee!!!!!!

Do not ever make the mistake of buying or selling a currency right at the resistance or support level. That would be a real gamble that may pay handsomely if the price goes your way. However, the direction of the price at this point is highly uncertain. Remember the concept of price testing support or resistance? Sometimes the chart might appear to be breaking support, but it is actually just testing. Nonetheless, the price might actually break support and goes dipping like a plague. So, you better wait until the price bounces convincingly.

From the figure above, the EUR/USD has tested the support. A poor trader will sell or buy at exactly Point A where the currency pair is testing support. A good trader will wait until the price reaches point B to see whether the price was just testing or actually breaking the support. Because the chart was testing, a savvy trader waits until the price bounces and buy at point C. if the line graph goes just slightly beyond support and goes back up again, it means the currency will not break support, so you buy the order right at the bounce (point C).

  • C = Entry Point
  • D = Take Profit
  • E = Stop Loss.

You may also want to wait the price to bounce off resistance if you are looking for a sell order.

In this case, you sell the order when you are sure that the price is not going to break through the resistance level.

The Break

The second strategy involves making a trade order when the resistance or support level breaks.

These levels break when the price goes beyond the support or resistance level.

In the example above, of the price goes past support, reaches point B, and goes further down without bouncing back, you know that support has been broken.

You can play breaks in Forex trading by using either the aggressive or the conservative strategy.

a) Aggressive Break Trading

Aggressive trading in Forex breaks involves selling a currency pair when the price breaks convincingly through support or resistance. You have to be supper convinced that the price is indeed passing through resistance or support before making a trade decision.

The figure above represents an aggressive sale of EUR/USD when the price is convincingly breaks through support.

b) Conservative Break Trading

This strategy applies to a position that has already been taken using the ‘bounce’ strategy. For instance, assume you buy a EUR/USD hoping for the price to rise once it bounces off support. Unfortunately, the price refuses to bounce back and breaks the support level. You have two options:

1) Accept loss and close the position

2) hold tight and wait for the price to increase again.

If you take the second option, the price can work for you and start making profits. However, it can also lead to a margin call and you lose a significant amount of your investment. Waiting for the trend to reverse really needs some patients, otherwise you will develop some Goosebumps or butterflies in the stomach.

This is why it is good to set a “stop loss order” to minimize your losses. Don’t be overambitious; know when to wait and when to quit.

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