Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
LEARN HOW TO TRADE USING SUPPORT AND RESISTANCE LEVELS
In today’s episode we are going to look at using support and resistance levels to trade the forex market and popular strategies surrounding this. Previously we have discussed support and resistance and some of the aspects surrounding its value, however today’s lesson will be a strategy based one.
Support and resistance is one of the most powerful analysis tools in trading. most forex strategies have some form of support/resistance analysis factored in to them as it is vital to to foreseeing areas in the market that may help or hinder our trades.
We know that Support and resistance develops surrounding key areas that price has regularly approached and rebounded previously. If we couple this knowledge with identifying the overall trend in a pair, being able to identify potential entries and additionally identifying our exit positions we have the basis for a strategy.
Strategy building is an essential part of a forex traders profession. Copying what others have already done is always a good start but as time goes on you will probably want to incorporate analysis that you have found to provide you with better long term results. We should look to discard what doesn’t work for us and retain what does ruthlessly in order to fortify our trading mindset and strategy.
So firstly a quick look over our definitions!
Support is defined as an area on a chart that price has dropped down to but struggled to break below. support is the price level at which demand is strong enough to prevent the price from declining further.
Resistance is defined as an area on a chart that price has risen up to but has struggled to break above. Resistance is the price level at which supply is strong enough to prevent the price from climbing further.
We have already discussed the basics in our beginner video so let’s move on to the strategy side of things which is our topic for today.
SUPPORT AND RESISTANCE TRADING STRATEGIES
We have four strategies to cover today and they have been chosen for their popularity, ease of use and effectiveness. They are easy to apply and I encourage you to back test them all to see which suits you the best.
1. Trend-line strategy
The basic idea behind the trend-line strategy is that it is using the trendline as either support or resistance relative to its upward or downward direction. We can implement the strategy by drawing a line connecting the high points in a downtrend, or by drawing one connecting the lows in an uptrend.
In a strong trend under normal market conditions price will usually continue to bounce off the trendline and respect the direction of the trend. This is why we only look for buying opportunities in a up trend and selling opportunities in a down trend. The trend is your friend so do not bet against it.
2. Breakout strategy
Breakout strategies can be very effective when done right. Generally speaking after long periods of ranging or consolidating markets eventually the price is going to move beyond its usual support and resistance levels. It’s a inevitability that we can capitalise on if we know what to look for. We as traders can often look for breakouts below support or above resistance in order to capitalize on further increasing momentum in the direction of the break.
If we wait until our potential break out has gone through our support or resistance level, then pulls back to that level we can achieve a great entry with good risk to reward ratio as well as avoid the common issue traders face of trading false breakouts by entering in to their prematurely.
We should always wait to confirm our theories by reading the evidence the market is providing, timing your entries is something you will get better at with time but can be improved by keeping a trade journal and honestly reflecting on the results of all your trade entries.
3. Range trading
Range trading is employing strategies surrounding a sideways trend. We can look to trade the space between the support and resistance as traders aim to buy at support and sell at resistance. Some currencies pairs have previously and still offer fantastic range trading opportunities. For instance look at the Range that spanned from January 2015 up until July 2017 on the EUR/USD Pair. Sideways ranges like these offer perfect range trading circumstances where there is no clear sign of trend.
Now we have discussed this before but I feel it’s important to reiterate here, Levels of support and resistance are not always exact prices and sometimes referred to as zones. You find it easier to identify a buying or selling zone rather than a specific price level.
When the market is ranging, traders tend to look for long entries after price bounces off support and short entries when price bounces off resistance. It is clear to see when review