To trade Support and Resistance in forex, you have to learn to properly identify levels.
Trading support and resistance is not hard. If you have been following right from the beginning of the support and resistance session, I expect you to at least have a hint about it already.
Like any other tool, support and resistance help us to define entry and exit levels on the market charts and predict trade signals.
Now that you know how to draw support and resistance levels, let’s take you through on how to trade them.
How you trade support and resistance is the same way you should trade trend lines and channels.
Buy when price bounces a support and sell when the price bounces on resistance.
Also, buy when the price breaks resistance and sell when the price breaks support.
Trading a breakout on support and resistance.
Like we said price tends to hold on the levels of support and resistance.
If you observe the chart below,
You will realize that at the identified levels of support and resistance price always found it hard to break through.
This would give you a clue as a trader that once price breaks such a level, it will rally for some time before stopping a gain.
As most traders tend to believe in these levels, the prophesy tends to come true.
However, this cannot happen all the time. The fact that the market is driven by people’s feelings and emotions, it reminds us that this is not a perfect world.
So at a certain time price will violet and break through.
AUD/USD, Daily chart shows break outs and bounces on support and resistance levels.
A bounce on support gives a buy signal and a bounce on resistance, it gives a sell signal.
On the other hand a break out on support gives a sell signal while a break out on resistance gives a buy signal.
Carefully look at the chart above and try to follow price directions after these scenarios.
Let’s now look at how trade support and resistance break outs.
1.The aggressive way
From the chart above, points circled show price break on the support levels on the market chart.
As price moved down, it broke the support line marked 1 giving us a sell signal.
An aggressive trader, would enter immediately after the close of the breaking candlestick below the support line. Stop loss would be slightly above the entry level and take profit slightly above the next support level.
Looking at the above chart, price made a bounce at support level marked 2 and finally broke the previous support which is now a new resistance.
When price breaks a support, it becomes a new resistance. Therefore we have a buy signal at the break of the new resistance.
An aggressive trader would take a trade as soon as candlestick breaks and closes above the resistance.
A confirmation is considered when the bearish candlestick breaks the support level and closes below for a downtrend and when a bullish candlestick closes above the resistance level for an uptrend.
In summary, to trade aggressively;
- Sell just after the close of the breaking candlestick below the support level.
- Buy just after the close of the breaking candlestick above the resistance level.
- Place your stop loss slightly above the support level or below the resistance and not on the support or resistance levels. You know why? Price can hit your stop out, bounces and continues to your direction.
2.The conservative way
With the conservative way of trading a breakout, you just need double confirmation to place a trade.
When price breaks a support or resistance line, it sometimes pulls back to retest these levels. This is when this kind of a trader warms up to catch his /her entry point. I emphasize, “it sometimes not always.”
If you are this kind of a trader was to trade on the same chart above, let’s see what you would take as your entry point levels.
From the chart above, the circled points show how price retested the support level after the break out.
The retest levels are your entry confirmations.
Candlestick patterns on support and resistance
Looking at the chart above;
On our first retest we have a sell signal which was confirmed by the bearish engulfing pattern.
When you notice any candlestick pattern form on these levels of support and resistance, there are higher chances that price will continue in that direction for a while. This is something that should not skip your attention especially when it happens on a support or resistance.
From the chart above,
the formation of a large bearish candlestick after the engulfing pattern confirmed our entry as it closed below the support line.
Stop loss should be slightly above the high of the bullish candle and the target slightly above the next support level.
After price bounced off the second support line,
it broke our new resistance, previously a support before a break out. This signaled a buy. Despite that, as a conservative trader, you take position only after price retest. The area circled indicates a retest on support.
If you can take a good look on our second retest, you will see a bullish engulfing pattern identified by the circle.
The formation of the bullish engulfing pattern gave a strong signal for us to take a trade. The next bullish candlestick gave confirmation for our buy entry position.
Stop loss would be set slightly below the broken support and take profit target slightly below the next resistance level after your entry point.
When you Wait for a pullback confirmation, it may save you from fake outs but it rarely happens. On the other hand, you may miss out on some trades in case price is very swift as it breakout the support and resistance.
Now let’s look at the second way to trade Support and Resistance;
Trading bounces on support and resistance.
As price falls or rises approaching the major support and resistance levels, it is likely to do 3 things.
- Hold and congest on support or resistance.
- Break the support or resistance
- Bounce back from the support or resistance level.
When price bounces back you can take advantage of the bounce either on a support or resistance.
Wait for confirmation candle to close before you take your entry.
Lets have a look on the chart below:
The above chart shows how you can trade support and resistance levels as price bounces off these levels.
From the above chart, all reversal/ bounce points are identified with black circles.
Point 1 gives us the first price bounce on the resistance 2 with a long pin bar and a bearish engulfing pattern.
If you were to trade that, your entry would be at the close of the next bearish candlestick.
As price rallied down, it found support below and bounced back. This gave a buy signal on reversal (Buy 1) on the support with a bullish candlestick with a pin bar.
So your entry would be at the close of the next bullish candlestick. Come to points 3 and 4, they also indicate a bounce on the resistance 1.
Previously, we said that the strength and validity of a support and the resistance level is determined by the number of times price attempts to break through but fails.
Once you have identified this strong level you can buy on a support bounce and set your stops a few pips below or sell on a resistance bounce and set your stop level a few pips above the resistance hence sell signals.
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