Forex traders use numerous trading techniques and strategies to increase their odds of successful trades. Technical analysis is a powerful tool utilized by traders to keep them in front of the trading curve. Support and resistance along with trend lines and channels are examples of forex strategies utilized by traders to help them increase the odds of winning trades. Also, support and resistance gives the trader a better understanding on price movement to help maximize trades.
What exactly are support and resistance levels? The best way to describe support and resistance levels is to think in terms of the direction of price action. Prices move because of the buying and selling activity of individual buyers and sellers within the forex markets. Price resistance takes place for an asset moving to a higher level when the selling activity of that asset is greater than those that are purchasing that asset. Conversely, support levels are in place preventing prices moving to lower levels when there are more traders purchasing that asset then selling.
It is not easy for a trader to consistently determine support and resistance levels and this can be an ongoing challenge. However, when they are able to get a better handle on support and resistance lines they will be able to utilize this powerful tool to make better decisions and optimize their trading strategies.
Getting a firm grasp on support and resistance and how this affects their trading strategies is key to a new trader. When leveraging support and resistance, there are usually two steps that may be focused on. The first step of support and resistance is to determine how to plot these lines and the second step is to figure out how levels of support and resistance will affect the trader’s trades.
There are numerous timeframes which may be utilized with support and resistance lines. Typically, support and resistance are best used with larger time frames such as daily, weekly and monthly frames. If a trader attempts to use support and resistance timeframes which are lower such as twenty, ten and five minute intervals they will invariably build models which are confusing and possibly detrimental to their forex trading activity.
What exactly is a bounce and how it relates to support and resistance? A bounce is a trading strategy used by traders when utilizing support and resistance levels. Just like it sounds, a bounce is when price action bounces off a support or resistance level. Unfortunately, many traders don’t have the best trading strategies and will set their orders specifically on support and resistance levels. This type of strategy may work but is not optimal for consistency within the forex markets. When utilizing a bounce strategy the trader wants to increase their chances of a successful trade by confirming that the support as well as the resistance will remain constant. The trader may then wait for the price to bounce before entering into their trade. If a trader is patient they will not put themselves in a situation where price moves quickly and breaks through support and resistance levels.
What happens if support and resistance levels don’t hold? Support and resistance levels have a tendency to break. Typically, there are two strategies that a trader may use to play a break. The first way is to be aggressive with your trading strategy and the second way is to take a more cautious/conservative road. When utilizing an aggressive trading strategy, one approach is to purchase or sell whenever the price pushes convincingly through the support/resistance threshold. When utilizing a conservative approach, this entails being passive with your trading position and potentially jeopardizing your position and losing money.
Quite frequently the question arises what are horizontal support and resistance lines? In a nutshell, the more points a trend line has associated to it the more a trader will view the line as a line of significant level. Also, if a trend line has only two points of contact or these lines do not appear to be bounces, many traders may not take the breakthrough of the line seriously.
It is important to note that trend lines can have a very long life cycle and can actually last for years. It is important for the forex trader to keep in mind that support and resistance can go back for decades, which will invariably affect their strategy and trades.
Another factor to consider is that support as well as resistance levels can have false breakouts. Support and resistance levels should be observed as trading zones. The best way for a trader to identify these zones is to construct and uncover the zones on the line chart instead of utilizing charts such as candlesticks.
Another form of trend line/strategy that the trader may utilize are channels. A Channel trend line is extremely useful and valuable tool for the trader. The reason channels are so useful is that they help the trader to recognize breakouts in either direction of a trend. The strategy when using a channel is similar to that of a trend line. When a trader uses a channel the trader will typically wait for the price to touch one of the channel lines.
In closing, there are numerous strategies which a trader may leverage off of to maximize their trades. Traders should become well versed with support and resistance levels to maximize their trading potential.