We looked at what support and resistance are now it’s time to see how to trade them?
The time has come to apply what we have learned so far in the previous article. There is no way we can say that support and resistance are more important than divergences or certain indicators.
We need to understand that there is no such thing as the most important thing in trading and we need as many indications in our favor in order to open a trade. Still, we must know that support and resistance are very powerful tools.
They can help us both to open a position and to close it. Later in the article, we will give you illustrative examples of everything we have talked about so far.
We will try in the simplest and most understandable way to show you everything. What you need to remember is that things are not really complicated but they are many. If you are patient, persistent, and disciplined, this can bring you very good results. And this applies not only for trading but about everything in life.
We first want to look at the breakout and bounce of support and resistance.
Let’s look at the following chart. As we can see on the image we have opened a Buy position at EUR USD on a 4-hour chart.
Note that we have put the stop level at the previous bottom, but we will talk about stop levels in forex trading in the following articles.
The first thing we can see is that we have drawn a trend line at the bottom of the EUR USD currency pair. This trend line shows us that we have an uptrend and it is good to look around for Buy order. This upward trend line is our resistance.
The second thing we can see is that we have drawn in red a resistance that has been broken and becomes immediately support (we have marked it with a green rectangle). We see how the price is repelled simultaneously by the trend line (resistance), and also the bounce off the support which is a very strong level.
Here we will give you a bonus; we have one more thing: an engulfing candle is drawn which is also a very powerful weapon in forex trading.
How far can we hold a position in case of breakout and bounce of support and resistance?
We took a screenshot of the open position of EUR USD a little later. As you can see we have already moved the stop of the order to profit this way we guaranteeing a certain profit in case the market becomes more volatile or makes a sharp movement in the opposite direction.
How long can we hold our positions in case of breakout and bounce of support and resistance, and not only? We have marked the previous top in yellow, and it is good to keep an open position next to the previous top or the previous bottom (depending on whether we have opened a Buy or Sell). It is always a good idea to move our stop loss on to profit or close our position partly but we will talk about this in the following articles.
In the beginning, it is good to mark previous bottoms and tops so that your eyes can get used to them more easily. Then you will see that it is not difficult to trade them but here we have to share with you, we do not rely only on support and resistance, trend lines, and engulfing candles. When we are entering a trade we always look for as many indications in our direction as a confirmation of the direction of the price.
Entering a position is like buying a car. When you go to buy a car, you do not take it just because of the color of the car, but you look at the suspension, interior, engine, test it.
It is exactly the same in trading we look for more than just one confirmation.
Use several confirmations in forex trading.
Breakout and bounce of support and resistance in a downtrend.
So far we’ve looked at how to trade a breakout and bounce off support and resistance in an uptrend, but like we know the price of an instrument can’t go in one direction forever. There comes a time when the price makes an adjustment and begins to reverse the trend, at which point we must begin to focus on selling.
Here we can see from the screenshot, we have drawn the levels of support and resistance, we have also determined the trend with the red trend line. As we know so far with a downtrend each subsequent top is our resistance, and each subsequent bottom is our support.
The price of EUR USD has bounced off the trend line it also does not have the strength to break the trend line, this way the third top is drawn (which is our resistance). Once we have done this analysis, we can start looking for a place to open a sell position. Of course, when trading, follow proper money management, we will talk about that later.
How long can we hold the position open?
Here is the answer to this question. In order to correctly determine our take profit, it is good to see where the previous bottom is because there is a strong level there and we can close our position or at least part of it.
With yellow we have determined where our previous bottom is.
For a start, it is good to learn that our bottoms and tops are very strong supports and resistances, which is why when opening a position, we determine where the previous bottom/top is, and this is how we can determine at what level it is a good idea to close our order.
Here is something important: the fact that we have determined where the previous bottom is, and we have put our take profit there, does not mean that the price will always go to hit our take profit at the exact level we have set. It is good to monitor the position, and as you approach this level to close and collect your profit, or 80% of the movement (we will show you this in the following articles), or close part of the orders.
How did we manage the position?
Here is how we played out this movement. We looked at why we opened, now we will look at what we did shortly before closing the position.
As you can see, the price has reached the level of the previous bottom, but we have moved our stop loss into profit already. This way we have guaranteed a certain profit if the price makes moves in the opposite direction.
In this article, we looked at how the bounce of support and resistance plays out.
we have seen how breakout of support and resistance, and bounce of’s are traded.
we saw how we could define where our take level is the take profit.
we saw how we enter a position also with the bounce of a trend line.
we saw how to manage our position.
we saw how to determine entry and exit positions.
we saw how to ensure a certain profit by moving the stop level to plus.
In the next article, we will look at how we can trade the breakout of these zones of resistance and support. Note the difference in this article we looked at the breakout and bounce of these levels, and in the next, we will look only at the bounce from these levels.