Now that you know how to trade support and resistance, it’s time to put these simple yet powerful technical indicators to work in your trading.
Because we want things to be simple at fxpipsguru.com, we’ve broken down how to trade support and resistance levels into two simple concepts: the Bounce and the Break.
One strategy of trading support and resistance levels is just after the bounce, as the name implies.
Many retail forex traders make the mistake of placing their orders on support and resistance levels and then sitting back and waiting for their trade to execute.
Sure, this can work at times, but it’s based on the assumption that a support or resistance level will hold even if the price hasn’t yet reached it.
“Why don’t I just put an entry order directly on the line?” you might think. That way, I know I’ll get the best deal.”
When playing the bounce, we want to increase our chances of success by finding some kind of assurance that the support or resistance level will hold.
For instance, rather than buying right away, we’d rather wait for it to rebound off support before entering.
If you’ve been looking to go short, you want to wait for it to bounce off resistance before entering.
By doing this, you avoid those moments where price moves fast and break through support and resistance levels. From experience, catching a falling knife when trading can get really bloody!
Support and resistance levels would never change in an ideal world, politicians would never lie, McDonald’s would be healthy, and we’d all have jetpacks.
In an ideal forex trading universe, we’d be able to simply enter and exit whenever price reached those significant support and resistance levels, and profit handsomely.
The truth is that these levels are prone to failure… frequently.
So simply playing bounces isn’t enough. You should also be aware of what to do if support and resistance levels fail!
In trading, there are two approaches to taking breaks: aggressive and conservative.
The Aggressive Way
When price convincingly crosses through a support or resistance zone, the simplest method to play breakouts is to buy or sell.
Because we only want to enter when the price easily crosses through a strong support or resistance level, the keyword here is persuasive.
We want the support or resistance area to wilt in misery when price breaks right through it, as if it had just taken a Chuck Norris karate chop.
The Conservative Way
Consider the following scenario: you opted to go long EUR/USD in the hopes of it rising after bouncing off a support level.
Soon after, support collapses, and you’re left holding a losing position with a steadily declining account balance.
A. Give up, get out of there, and liquidate your position?
B. Hold on to your trade in the hopes of a price increase?
If you choose the second option, you will have no trouble understanding this form of trading.
Always keep in mind that when you close a position, you are taking the opposing side of the trade.
You’ll have to short the EUR/USD by the same amount if you close your EUR/USD long trade at or around breakeven. The price will revert and start falling again if significant selling and liquidation of losing positions occurs near the broken support level. This tendency is the major reason why when a support level breaks, it becomes a resistance level.
As you can expect, taking advantage of this occurrence requires patience.
Instead of entering immediately when the price breaks, wait for a “pullback” to the broken support or resistance level, and then in after the price bounces.
A word of caution… THIS DOESN’T HAPPEN ALL THE TIME IN FOREX. BROKEN SUPPORT AND RESISTANCE LEVEL “RETESTS” DO NOT OCCUR ALL OF THE TIME. THERE WILL BE TIMES WHEN THE PRICE ONLY MOVES IN ONE DIRECTION, LEAVING YOU BEHIND. AS A RESULT, ALWAYS USE STOP-LOSS ORDERS AND NEVER HOLD ON TO A TRADE FOR HOPE’S SAKE.
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