Okay, so you understand the concepts, and you drew some pretty pictures, but how are you supposed to make money off of this? Good. Let’s get straight to the point and explore that.
Here are two very simple ideas to understand, just to make things easy. These two concepts are pretty essential, and they are the two B’s: The Bounce, and The Break.
This obviously refers to the strategy where you monitor support and resistance, and trade right after a bounce.
Here’s the thing about many retail forex traders. They set their orders on support and resistance, and think to themselves, “Oh, this will be easy. I’ll just buy here and sell here”. The bottom line is that this isn’t inevitable, though. The market isn’t obligated to fulfill your order!
One strategy is that you wait for it to bounce before entering a trade.
Bounce of Support / Bounce of Resistance
The theory here is that you watch the support and resistance lines closely and look for a bounce. Here, when you see that the price bounces of resistance – go short. When you see that the price bounces of support – go long.
The great thing about this theory is that you don’t end up catching a falling knife, where potentially, a level can break. Here, you potentially risk less by waiting to see some strength, and then trading that strength.
Now, support and resistance levels don’t always hold. This shouldn’t be shocking to you. Married couples divorce, Santa Claus isn’t real, and sometimes, life can disappoint.
It would be amazing if every resistance level could break when we went long, and every support level can break when we went short.
Now, if you want to play breaks – there are two ways to do so.
The Aggressive Trade
Ultimately, if your personality is a certain way, you might want to play the break aggressively. Here, we buy or sell whenever there is a significant move through the S/R zone – period. We sell after a clean resistance break, and we buy after a clean support break. Check out our breakout MT4 Expert Advisors !
The Conservative Trade
For some people, their ego isn’t as important as their account, and rather than making profit – one thing is most important for them, and that’s to protect capital. For this particular individual or trader, this might be the mentality. If you chose this approach, you might love the conservative trade, which helps you manage risk. Ultimately, you were trading on a theory, and it makes no sense to hold on if your theory failed. For some, this is the obvious strategy, and protecting your money can definitely be important when it comes to forex trading.
Here’s an example of a conservative trade – you go short on GBP/USD because you’ve analyzed from every angle, and you are hoping that you can make money after pullback off of recent support break
Ultimately, support and resistance levels are particularly important because not only because of the supply and demand, but because traders who short have to eventually buy the currency. That’s why when support breaks, there is often a rebound, as people cover their short trade.
This does take patience, and of course, experienced traders can recognize this, and take advantage of it more than the newer traders.
Similarly, there are traders who might notice the break, and love the fact that a resistance broke, and wants to go long – but wait for an actual pullback because they believe that it will happen. Believe it or not, pullbacks happen – and this can mean more profits for you.
However, if it was possible to predict the market – then there certainly wouldn’t be a market would there? You never know when levels will be broken, retested, or reinforced, and experience is the only thing that can help you truly get better at recognizing price action.
It's also important to ultimately have stop losses. Sometimes, breaks are breaks, with no pullbacks, and it’s time to exit the trade before getting too greedy, or getting too cocky.
Summary: Support and Resistance
Okay, so this is a lot of information to understand and truly absorb in such a short amount of time, so let’s go over this again, shall we?
The lowest point reached, before a currency goes up again, is considered support. This is especially easy to tell in context of when there is a bull market.
Remember again that no exact numbers can be used as concrete support and resistance – it’s not about having a number in mind, as much as understanding “zones” in general. The more you understand that there is some fluidity when it comes to support and resistance, the less likely you are to fall for a fake breakout, which can end up saving you lots of money in the long run.
Line charts can be great in terms of support and resistance, more so than candlestick charts.
When price passes through a resistance level, that resistance can then become a new support level. This is important to keep in mind. It doesn’t always happen, but it happens, and that’s something to keep in mind, at the very least.
This goes both ways though – if a support level breaks, it could end up being new resistance, which obviously can be frustrating for those who are long.
When it comes to trend lines, think of “peaks” and “valleys” as ways to illustrate support areas and resistance areas. Also, make sure that you draw the lines accurately and without bias, and don’t draw what you HOPE to happen in the market. Accuracy is more important than anything else here.
To draw channels, just make sure that all of your lines are parallel. As described earlier, the ascending channels are drawn at the same angle as uptrend lines, and descending channels have to be at the same angle as downtrend lines.
Keep in mind that an ascending channel has to continue to have higher lows and higher highs, otherwise it isn’t an ascending channel. Similarly, descending channels have lower highs and lower lows, while horizontal channels range in a specific area.
The bounce and the break are important concepts to remember when it comes to support and resistance, and recognizing the price action with these two concepts can be profitable.
Either way – you want confirmation before entering the trade. This helps you ensure that the price action is real, whether it is testing/potentially breaking resistance or bouncing off of support, or vice versa. This helps you avoid situations where resistance and support are completely smashed, so you can avoid chasing and also avoid catching a falling knife that could cost you, whether it’s short-term or long-term.
There are also two ways to make the trade – the aggressive way, where you enter a trade as soon as the price bounces or breaks, and believing in the strength of that current price action. There is also the conservative way, where you protect capital by waiting for pullbacks when there is a broken resistance level, or after a price bounces off support. The idea is that you wait for a particular opportunity, or don’t pursue the trade at all, hence the “conservative” moniker.