How to Trade Support and Resistance

Now that you have learned the basics of trading with support and resistance, it is time to start using these simple yet very useful technical indicators for trading.

I like to make things easier to understand on WikiFX, so I've broken down the levels of transaction support and resistance into two simple concepts. Bounce and break.

The Bounce

As the name implies, one approach for trading support and resistance levels is soon after the rebound.

Many Forex retail traders make the mistake of placing an order at a bullish level and then sitting down and waiting for the transaction to be executed.

Sure, this can work occasionally, but it's dependent on the idea that some level of support or resistance will persist even if the price hasn't yet hit it.

“Why don't you risk your entrance order？” you might think. So I'm sure I'll get the best deal.

When playing bounces, we want to increase our chances of success by ensuring that the degree of support or resistance is maintained.

Rather than purchasing right away, we'd wait for it to bounce back off support before entering.

Wait for the resistance to bounce before entering if you wish to short.

This keeps the price from moving too fast and breaking through the levels of support and resistance. I can tell you from experience that catching a falling knife while trading can be a bloodbath!

The Break

In an idealistic world, support and opposition numbers would never change, politicians will never ever lie, McDonald's would be nutritious, and we'd all have jetpacks.

In a perfect forex trading environment, we'd be able to profit handsomely by simply entering and exiting when price approached those important support and resistance levels.

The truth is whether these levels are typically prone to failure.

So just playing bounces isn't going to cut it. You should also know what to do if bullish levels are broken!

In trading, there are two approaches to taking breaks: aggressive and conservative.

The Aggressive Way

The simplest way to play breakouts is to buy or sell when price solidly crosses through a key resistance zone.

The term here is compelling, because we just want to enter when the price easily crosses through a strong support or resistance level.

We want the key 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

Imagine the following circumstance: you chose to go long EUR/USD after it bounced off a support level in the hopes of it rising.

Support soon collapses, leaving you with a losing position and a constantly dropping account balance.

Do you...

A. Give up, get out of there, and liquidate your position？

B. Hold on to your trade in the hopes of a price increase？

You will have no issue comprehending this type of trading if you do choose the second choice.

Always remember that when you close a trade, you are taking the other side of the transaction.

If you close your EUR/USD long trade at or around breakeven, you'll have to short the EUR/USD by the same amount.

If considerable selling and liquidation of bad matches occurs near the failed support level, the price will reverse and start sliding again.

This is one of the main reasons why a support level that breaks becomes a resistance level.

As you can expect, effective utilization of this occurrence requires patience.

Wait for a “pullback” to the broken support or resistance level before entering after the price bounces, rather than entering immediately when the price breaks.

A word of caution... THIS DOESN'T HAPPEN ALL THE TIME IN FOREX. BROKEN Bullish LEVEL “RETESTS” DO NOT OCCUR ALL OF THE TIME. There Would 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.

Sorry for the inconvenience, but the Caps Lock key became stuck.