Forex Articles

FOREX TRADING SUPPORT AND RESISTANCE

What is Trade Support and Resistance?

If you are familiar with basis of forex trading it is worthy to expand your knowledge with some useful technical tools which will support your trading skills. For easy understanding, trade support and resistance levels were divided into two much simpler concepts like the Bounce and the Break.

Bouncing technique

This kind of technique of trading support and resistance level has a place a moment after the bounce. The majority of retail forex traders has a habit of waiting for a materialization after setting an order on the support and resistance levels. There is no doubt it may sometimes work, but there is also a risk of holding support or resistance level without price getting there. Some of traders ask a question, “Why don’t try to set an entry order when the prices reach the line?” There is a chance to start with the most profitable price when playing the bounce. In this way, it is necessary to tilt the odds in the best position and get some speculation when the resistance or support will hold. Some of you can ask, “What does it give for me?”. Well, this technique of entering after the bounce lets to avoid those “crazy” moments when the price moves the fastest and exceeds the support or resistance levels. This method is known to be less dynamic but safer.

Breaking method

The best situation for each forex trader would be constant support or resistance levels. I guess is not even possible in Narnia or some other fantasy universe. Unfortunately, these levels break really often… Playing bounces seems not to be enough. Complex forex trader should know what to do when such break happens. There are two styles of playing breaks in forex. The first one is an aggressive way, and the second is the opposition, conservative way.

Go straight ahead!

The aggressive way of playing breaks is not so complicated. The easiest way of playing breakouts is to trade (sell or buy) when the price exceeds a support or resistance area. The most important there, is a way of passing price through those areas. When it is done with ease, the decision about trading should be taken. When the price do not pass the area convincingly, we should hold the decision, because there is bigger chance of failure.

Relax, take it e-e-easy…

The second method is the conservative style, but we are not talking about Donald Trump’s presidency. Conservative in this case means patient. Let’s give an example for better understanding this idea. Let’s say you would like to go for long USD/EUR after it bounced from the support level. While after that, your support level breaks and you are slowly losing your account balance. There are two possible behaviors which can be distinguished in this situation. The first one, you accept your defeat and liquidate this position. The second one – you do not do anything and wait for the moment the price will rise again. When you are the person who will chose the second option you will easily understand the conservative tactic. It is necessary to remember, when you close some position you should take the opposite transaction. When you went for long USD/EUR and it seems to break, closing it near the point of break means you should start with short USD/EUR with the same amount. However, the situation when the price is falling down will happen soon because of liquidation of some loosing positions, so the opposite action should be performed. This phenomenon can be used to get some nice income, however this tactic is not for nervous man. It is all about patience. You do not enter in the moment of break, but you wait for the “pullback” and enter after the price has bounced. It is necessary to know, this situation does not happen all the time. There is possibility the price will move in one direction and you will be left behind. There is no one rule. To prevent this situation, try to use stop loss order and keep calm. Rational thinking and toning down the emotions is the key to be successful not only in such situations, but in your forex trader career.