Just as there are rules for trading Japanese candlesticks, there are also several rules you need to follow if you want to make wise trading decisions in the Forex market.
5 Trading Rules for Support and Resistance
These rules are:
- Draw your support and resistance lines.
- Draw your trendlines – Remember: trade in the direction of the trend, because the trend is your friend. You want to be able to identify if the trend has been broken because you likely want to exit at that point.
- Decide whether you will go long or short (based on overall trend direction).
- Appropriately place your stop loss orders – For information on how to place stop loss orders when trading on support and resistance levels, see above. If the stop is too far away from your entry point the risk may be too great and you should consider passing on the trade.
- Create a plan. Trade the plan – Traders get in big trouble when they become emotionally invested in a particular trade and so hang on too long to a losing trade. Even if you follow all of the trading rules and trade all of your indicators correctly, you will lose on some trades, just as any business takes losses as well as profits. By sticking to your Forex trading plan you will maximize your profits and minimize your losses.
Past Resistance Levels Can Become Future Support Levels
As you read earlier, a bull wants to see the market achieve new highs, taking out previous levels of resistance and a bear wants to see the market taking out previous levels of support.
Sometimes past levels of resistance can turn into levels of support. This happens when the market has broken a the current level of resistance, but before it goes on to break the next level of resistance it bounces (bottoms) at the first level of resistance, which then becomes a level of support.
Eventually the market will break the support level (once a resistance level) instead of bouncing there, indicating a trend reversal. To trade in this situation, buy at the support levels and set your stop loss order at the last support.
Past Support Levels Can Become Future Resistance Levels
Past levels of support can also turn into levels of resistance. This happens when the market has broken the current level of support, but before it goes on to break the next level of support it bounces (tops) at the first level of support, which then becomes a level of resistance.
Eventually the market will break the resistance level (once a support level) instead of bouncing there, indicating a trend reversal. To trade in this situation, sell at the resistance levels and set your stop loss order at the last resistance.
That concludes my basic overview of support and resistance for Forex trading. This topic will come up when explaining future trades, so make sure you review the basics about support and resistance in the Forex market until you fully understand them.
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