How to trade the support and resistance level

Introduction

Support and resistance level are two of the most important terms in the Forex market. If you want to succeed as a professional trader, you should have an in-depth understanding of this topic.

Key Takeaways

  • Traders use support and resistance levels to identify potentially successful trades
  • Support level occurs when a chart that is down-trending is expected to reverse due to a concentration of demand
  • Resistance level occurs where an uptrend is expected to reverse due to a higher supply
  • Using trend lines and moving averages can help you identify support and resistance levels

Support and resistance level are two of the most important terms in the Forex market. If you want to succeed as a professional trader, you should have an in-depth understanding of this topic. Unless you learn the proper way to identify the support and resistance level, you can’t take the short and long trade at the perfect price.

So, what is short and long?

In the Forex market, when selling an asset at a specific price level we call it short trade. On the contrary, if we buy the asset at the major support level, we call it long trade. A support level provides strong buying momentum and the resistance level fuels up the bears. You might be wondering what the heck is “Bear”?

To become a professional trader, we need to know some basic terms about this market. When the market is in an extreme downtrend, we call it the bear market. On the contrary, when the market is in a strong uptrend, we call it a bull market. Similarly, the support level is also known as the demand zone and the resistance level is often called the supply level.

Importance of support and resistance

Support and resistance levels are the key spots in which price tends to reverse its direction. At times, the price ends its corrective move after hitting the support and resistance level. So, if you intend to take the trade with the trend or focus on the reversal, you need to know the proper way to trade the support and resistance level. And for that, you must have the skills to identify these important levels in the main chart.

Drawing support and resistance horizontal line tools

To draw the support and resistance level, we can use the line tools. For the support level, we need to connect a minimum of three lows in the market. The resistance level is determined by connecting a minimum of three highs. Note that, the support and resistance level is often drawn by using the highs and lows of the market.

Using the trend line tools

As you become experienced, you will slowly learn the importance of a trend trading strategy. To draw the bullish trend line, you need to connect three higher lows in the market. On the contrary, the bearish trend line is drawn by connecting three lower highs. Once the trend line is drawn, you can take the trades at the trend line support and resistance level.

Some novice traders often draw the trend line in the lower time frame. But if you draw the trend lines in the lower level, chances are very high you will end up taking the trades in favor of the retracement. To avoid such a critical problem, you need to draw the trend lines in the 4 hours or higher chart. And make sure you are not forcing the highs and lows to match with the trend line. The trend line should match the highs and lows flawlessly.

Trading the support level

Now you know the proper way to draw the support level by using the line tools. To take the long trade, you need to wait patiently till the price hits a major support level. As the price tests a critical support level, you should cautiously look for the bullish rejection. Usually, the bulls gain control over the market after the price hit major support. As a result, we can see the formation of a bullish pin bar or bullish price action signal at the support level. Execute the long trade when you have the bullish price action confirmation at the major support level.

The long trades can also be taken at the break of the major resistance. If the resistance level gets breached, it becomes a strong support zone. Wait for the minor pullback in the price and look for the bullish price action signal. Once you have spotted the bullish price action signal at the broken resistance, execute the long trade.

Trading the resistance level

To take the trades at the major resistance, you need to look for a strong rejection. The price should test the critical resistance level and form a nice bearish price action signal. The bearish price action signals must be spotted in the 4 hours or higher time frame. Execute the short trade with a stop loss above the resistance level. In case, you want to take the short trade at the break of the support level, you need to have a bearish candle closing below the critical support. After that wait for the retest of the broken support level and take the short trade.

You might be wondering about the term “stop-loss”. Stop loss is nothing but a predefined price limit in which the trades will close automatically. Let’s say, you have taken the short trade in the EURUSD pair and placed a stop loss for $50. If the trade goes wrong, the maximum amount of money you are going to lose is $50. Regardless of the bullish rally, your loss is going to be limited by the stop-loss order.

Use of price action signal

The support and resistance levels are traded in a diversified way. For instance, some retail traders use the overbought and oversold state of the asset to take their long-short trade. When the price hits a major support level, they look for the oversold reading in the stochastic indicator. Just like this, we can use thousands of different techniques to filter the trade. But if you rely on the indicator-based trading system, we will always have to deal with complexities.

So, how do we solve this problem?

Well, we have a simple solution to solve this issue. We need to learn about the price action signals. By using the Japanese candlestick pattern we can even find the perfect place to set the stop loss for each trade. After developing the ability to trade with precise stops, we can easily increase the lot size in each trade without breaking the core rules of money management. This will significantly help us to maximize the profit.

Dealing with the loss

Never think you will be able to make a profit just by identifying the support and resistance level properly. At times, the support and resistance level often gets broken and there is nothing you can do about it. Even the very best trade setups often disappoint us. Professional traders deal with their losing trades spontaneously. They know losing trades is inevitable. That’s why they always trade with less than 2% risk in each trade.

Being a full-time trader, you also need to focus on the risk to reward ratio while taking the long and short trades. If you trade the market with a negative risk to reward ratio, there is no way you are going to survive in this field. You need to maintain a minimum 1:3 risk to reward ratio and only then you can expect to make a decent profit even after having a few losing trades.

Deal with the major news

The experienced traders always suggest the novice traders learn fundamental analysis. News factors are also called the prime price driving catalyst in the Forex market. The major support and resistance level are often broken during that time causing big trouble for the retail traders. But if you learn to evaluate the news data professionally, you can expect to avoid such a reversal in the trend. And always try to keep yourself tuned with the economic news calendar.

Learning to deal with the news is a tough task. Being a novice trader, you should focus on the impact of the news. Stop trying to take the trades at the critical news hours as the market volatility is extremely high. Focus on the simple technique and find the reliable trade signals after the price stabilizes. It is better to stay on the sideline rather than taking the trades at the extreme moment.

Dynamic Support and resistance

The dynamic support and resistance levels in the trading instrument are identified by using the 100 or 200-period moving average. If you take the trades at the dynamic support and resistance level, make sure you have mastered the price action trading strategy. Trying to make a profit by setting the limit order at the 100 or 200 periods moving average doesn’t work. You need to use a conservative trading strategy like the price action system to trade the major support and resistance level.

Improve your risk management technique

To maximize your potential profit, you have to reduce your risk exposure. Being a full-time trader, learn about the advanced risk management technique. Never take more than 2% risk in the trades as it will create a massive problem for your trading business. Follow the conservative trading technique and always be prepared to lose the trades.

Summary

Trading is all about probability. If you prepare yourself to deal with the losing orders, you won’t have trouble making a consistent profit. But make sure you always execute the trades at the critical support and resistance level. And never forget to trade with strict risk management rules.

Sources

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