In my trading years, I found that there is another profitable way we can look into. That is making money with support and resistance. Before we go into it, let me simply explain what support and resistance are, for those who are new to Forex trading. You’ll often hear analysts talking about a certain security approaching a resistance or support. These are simply price levels or a range of prices that a security or currency doesn’t often go over (resistance) or go under (support).
Here is a simple example of a resistance level and support level. You can see in the chart where the support is the level at which the price seldom falls below and the resistance is the level the price seldom exceeds. Each time the price hits the resistance or support, the price appears to hit a wall and reverses.
Here is where Forex traders look to buy at or near areas of significant levels of potential support in an uptrend or sell at or near areas of significant levels of potential resistance in a downtrend. One of the old saying that you might have heard from some traders – “buy low and sell high”. So, you might ask the question how low is low and how high is high. Well, the support and resistance strategy can be one way we can quantify these levels by observing where price has stopped and changed direction.
If you look at the previous chart, the price action is within a sideway range. Do not be mistaken by this thought that you can only apply here. You can also apply this strategy to an upward trend or a downward trend. Take a look on the below chart.
While we may expect price to reverse near the support level or resistance level, it may be best to wait for confirmation once price approaches one of these levels. I won’t assume that price will reverse here, but instead I will wait and see if that is the case.
It doesn’t matter what you use, but use something other than the support or resistance level to confirm that the price is indeed reversing. You may use another indicator (MACD divergence), candlestick formations (bullish/bearish engulfing bars) or price patterns (double top/double bottom) to confirm that a reversal is near.
I really believe that you can trade profitably with support and resistance because it works for me. Obviously you should find out if this strategy works for you. Almost all profitable traders share a common attribute – they back test their trading strategies. Don’t take my word for it, test it out for yourself by manually back testing them or by opening up a demo account to see if you can apply it profitably for yourself.
I hope that this strategy will help you be a better trader and make more money!!!