May 12, 2021, | AtoZ Markets – In forex trading, there are tools called resistance and support. These tools can be beneficial for traders when they are applied and executed correctly. At first, they may seem pretty simple; they tend to be more complex than how they appear to be. This article will let us understand how to use support and resistance in trading further. To make things a lot easier to understand, let us divide the way we trade them into two types: the bounce and the break.
The first method: the bounce
The bounce method means trading the support and resistance level after the bounce, hence its name, the bounce method. Some traders set their orders straight to the support and resistance levels. All they do is wait until their trade materializes. This practice is a common mistake of traders when they trade support and resistance levels. Sure, it may work sometimes, but we cannot get lucky all the time, right? A trader should not always expect the support and resistance levels to hold when the price is not even there yet. The traders who do this set their entry directly on the line, thinking that they ensured the best possible price.
A trader who uses the bounce method hopes for a confirmation that a support or resistance level holds. To explain more, if you are buying, then you do not just simply buy straight away. You can wait for it to bounce off support before your entrance. On the other hand, if you want to sell, you will wait for it to bounce off resistance before your entry. If this is your action, you can avoid those swift price moves and break through the support and resistance levels.
The second method: the break
In reality, support and resistance levels do not hold out permanently, and we know this. The support and resistance levels break, and this has always been a pill for us traders that is too hard to swallow. And if we are saying these things, we understand that the bound method would not be enough. So, once the support and resistance levels break, then there are two things that you can do. The break is further subdivided into two ways: the aggressive way and the conservative way.
The first way is the aggressive way. When a breakout happens, you can simply buy or sell as the price passes through the support and resistance zone convincingly. And when we say convincingly, we mean that our entrance should only be when the price easily passes through the significant support and resistance level.
If the aggressive way does not convince you, you can always choose the next, the conservative way. Let us assume that you went long. You expect that it will increase as soon as it bounces from a support level. However, the support breaks, leaving you with a declining account balance. In this type of scenario, you have two choices. One is an exit and liquidating the position. Another is to wait out for a little more time, hoping that the price still has a chance to increase. If you are team latter part, then this conservative way of the break method is for you.
More on the conservative way
Closing a position means taking the opposite side of the trade. Assuming that you closed a long EUR/USD position when you are just about to break even, then you will have to short the EUR/USD position with the same amount. If a losing position gets enough selling and liquidation at the broken support level, then there will be a price reversal, and it will decline again. It is now evident why once the support level breaks, it becomes a resistance level. If you are a patient trader, then you can take advantage of this. Wait for the price to pull back to the broken resistance or support level instead of making an entrance directly on the break. Later on, enter as soon as the price bounces off.
Words a trader can ponder.
Forex trading will always be unpredictable. Support and resistance levels do not always break. However, prices do not always go in one direction as well. But still, it is essential to remember to use stop-loss orders and never depend your money and trades on luck.