How do you trade price support and resistance bounces? How hard is it to predict price movements. In this article I've shared my 3 ways to improve your support & resistance trading skills!
AtoZForex – Forex trading might be challenging since financial markets tend to move very quickly. Often, it is impossible to predict the next market move. Consequently, traders face difficulties, when trying to foresee the point of price reverse. I've even seen many traders say:"Only if I traded opposite of what I traded."
I can see you saying yes, me, me, me! Yet, there are some techniques that will aid you in forecasting the price bounces successfully.
3 easy steps to trade price support and resistance bounces
How easy is it to trade price support and resistance bounces? Don’t worry, you are in the right hands, I have been there myself. There is nothing shameful to tell the reality. It is often frustrating! Even though there is no certain method to foresee the price reverse with 100% accuracy, there are a couple of ways you can improve your forecasting ability.
Today, I will discuss price support and resistance bounce forecast strategy/ies. The strategy comprises the Average Directional Index (ADX) indicator, support and resistance levels, and a positive risk-reward ratio.
#1: ADX indicator
The first question you need to ask yourself about how to trade support and resistance bounces is: is this pair ranging?
While this might be hard to answer, there is a Forex Indicator called ADX indicator that will help you. Moreover, all of the traders tend to use a different kind of market analysis. All of us use various methods for the specific pair and the time frame. In addition, the term ‘range bound’ may mean something different for you, but don't worry I will cover it for you.
For our specific mission to forecast the price support and resistance bounce, we will utilize the Average Directional Index. This particular indicator can remind you any other traditional oscillators with a single line that fluctuates up and down. However, that is the only lookalike feature. The ADX indicator is displaying the strength of currency pairs’ trend, rather than the strength of weakness of a currency pairs’ price action. This implies that the ADX indicator is direction indifferent. It is only measuring whether the pair is trending or is moving sideways.
See the example of ADX indicator below:
The higher the reading of ADS, the stronger the trend is. The reading below 25 is what we need to focus on since we are looking for the price reversals. As the chart above suggests, when the price begins to move sideways, the ADX indicator’s reading drops below 25. Then, when the price is moving in some particular trend, the ADX climbs to 25 and above.
Therefore, I suggest keeping to eye at ADX Indicator’s reading below 25, where the price bounces are more likely to take place. WARNING: ADS below 25 could also mean no trade for you if you want to just follow the trend.
#2: Support and Resistance Lines
Most of the traders find this part of the strategy the most difficult. However, this is also the mist fundamental part of the strategy for price support and resistance bounce forecast.
We will be looking into prior swing high and lows and using them as the potential areas of the price bounce. You can use your usual application to draw horizontal lines every time the price posts a notable high or low and then bounces.
The key idea here is to find these levels and to use them as your support and resistance levels in the future. Below on the chart, you can see 5 key levels. These levels indicate the price bounce in the past and extension of the horizontal lines further.
Drawing Support/Resistance Lines
#3: Trading the Bounce + reward-risk ratio
The last, but certainly not the least step of our strategy on how to trade price support and resistance bounces is actually trading the bounce. We need to spot the price approaching one of the lines that we drew on the chart, while the ADS Indicator’s reading shows below 25. In this way, we are sure that the price has the potential to reverse at these lines.
The chart displayed below provided us with two options for the trading of this pair:
- The first option is when the price approached the resistance line
- The second option is when price approached the support line
Note, that both of these moves took place, while the ADX reading was below 25.
Two Trade Entries Using and Support/Resistance
Looking at the chart we can also notice that the price has actually reversed at these lines, meaning that these trades would have been successful. However, this is not always the case.
Sometimes, prices will not bounce and the trade will bring you loss. For this reason, we recommend using a positive risk-reward ratio. In order to do so, you would want to set a somewhat tight stop loss beyond the support/resistance line. Moreover, you will need to set your profit target at minimum twice as far as you stop loss.
This combination will reduce your needed win rate to stay profitable.
Final support and resistance bounce defining weapon
As a final add to trade price support and resistance bounces, I also would recommend you to use 20 and 100 SMA (SMA stands for Simple Moving averages). When the market would be between the two moving averages, you would have a flat, ranging market conditions. Meanwhile, the 100 SMA would show the overall direction of the trend, combined with the ADS and 20 SMA would be acting in line with your trend lines if you have outlined them correctly. This can be done on H1, D1 or W1 time frames.
Think we missed something? Let us know in the comments section below.