Support and Resistance lines are single most important tool of your Fx Technical Analysis. They are so powerful that many professional Fx traders trade exclusively with support and resistance lines.
But these lines won’t get you trading signals on their own. Imagine Support and Resistance lines as Peanut Butter in your Fx sandwich. If Support and Resistance lines ar Peanut Butter than Japanese Candlesticks are Jam in your ForEx sandwich. That’s how good they go together.
How to Draw Support and Resistance Lines?
Support and Resistance lines are drawn at levels where price did some previous high or low in a swing or level that price previously failed to break. We are drawing these lines at these levels because Fx traders remember this and tend to open/close their positions around these levels.
Support Line – line that has held as support in the past, making the price bounce off of it.
Resistance Line – line that has held as a resistance in the past, price bounced off of it failing to break this level
Difference between these two lines is on which side of the line is the currency pair price at the moment. If the price is below the line, that line is acting as a resistance. But as soon as the price penetrates this level, the line that acted as a resistance will act as a support with price being over it now.
When you connect two consecutive highs in downtrend or two consecutive lows in uptrend you will get a trendline. For trend to be confirmed you need to have 3 touching points with the trendline.
When drawing trendline you will connect either open/closes of the japanese candlesticks or their low/highs. Trendlines will show us the direction and the slope of a trend. By looking at that slope we can say how powerful is the trend.
Breaking of the trendline will signify end of a trend or loss in its momentum. Trendline that has once been broken will become resistance line, marking a resistance level.
In one trend you can draw multiple trendlines and use them, for example to close your trades on breaks of those little trendlines.
How to Successfully Trade Support and Resistance Lines in Fx Trading
Use Support and Resistance lines to draw channels. Channels are drawn when the price gets in the range and it fluctuates between two Support and Resistance levels. Currency pair price gets in range usually because market is expecting something to happen, whether that be some economic news release or it is a break of Support/Resistance line that has held for long. In channels you should trade price breakouts.
When price approaches Support/Resistance level look for the Japanese Candlestick patterns that will give you market entry signals.
Once the Support/Resistance line is broken you can either enter the market immediately or you can wait for the price retracement to Support/Resistance line to retest it and to enter on retest.
Breakouts are profitable for trading as they will give us great risk/reward ratio. You will be setting relatively small Stop Losses compared to your Take Profit Levels. You can either use high risk/reward ratios (1:3, 1:4) when setting up your take profit level, or you can use Fx Technical Indicators that will give you profitable exit points.
In trends, you can use bounces of trendline to enter your positions until trendline is broken.
What to Look for When Trading Fx Support and Resistance Lines?
Once the support level/line has been broken it became resistance level/line. Once the resistance level/line has been broken it became support level/line. Same, once the trendline has been broken it becomes resistance.
Higher is the trend slope, more powerful the trend, bigger is the possibility of trendline being broken. Trendline is not to be considered trendline until price tests it and bounces off of it.
The longer Support/Resistance line holds the more powerful and harder to break it becomes. Once this kind of Support/Resistance is broken the price move will hold a lot of momentum. Breakout of trendline is considered confirmed when full Japanese Candlestick has formed below/above it.
You can trade Trendline Breakouts
- Immediately, when the momentum is high
- After the first candle has been formed below/above trendline, and
- After that trendline was tested and it held
Once again, conservative approach for opening position is advised, wait for the trendline to be tested and to hold to enter the market.
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