Now that you understand the fundamentals of trading support and resistance, it’s time to put these simple but incredibly important technical tools to work in your trading.
To make things simple, we’ve broken how to trade support and resistance levels into two concepts: the Bounce and the Break.
One strategy of trading support and resistance levels is just after the bounce, as the name implies.
Many retail forex traders make the mistake of placing their orders directly on support and resistance levels and then sitting back and waiting for their trade to execute.
Sure, this can work at times, but it assumes that a support or resistance level will remain even if the price has not yet reached it.
“Why don’t I just specify an entry order directly on the line?” you may be thinking. That way, I know I’ll get the best deal.”
When playing the bounce, we want to discover some type of assurance that the support or resistance will hold.
For example, rather than purchasing right away, we want to wait for it to rebound off support before entering.
If you want to go short, you should wait for it to bounce off resistance before entering.
This prevents price from moving quickly and breaking through support and resistance levels. Having caught a falling knife while trading, I can tell you that it can be quite bloody!
In an ideal forex trading universe, we could simply enter and exit whenever the price reached those significant support and resistance levels and make a fortune.
The truth is that these levels frequently fail.
So simply playing bounces isn’t enough. You should also know what to do if the levels of support and resistance fail! In trading, there are two ways to play breaks: aggressively or conservatively.
The Aggressive Way
The most basic technique to trade breakouts is to buy or sell whenever the price convincingly crosses through a support or resistance zone.
The essential term here is compelling because we want to enter only when the price easily crosses through substantial support or resistance level.
We want the support or resistance area to shrivel in agony when the price smashes through it.
The Conservative Way
Consider the following scenario: you chose to go long on EUR/USD after it bounced off a support level.
Soon after, support is broken, and you are now holding a losing position, with your account balance gradually declining.
A. Accept defeat, flee, and liquidate your position?
or B. Keep your trade and hope the price rises again?
If you choose the second option, you will have no trouble understanding this type of trading approach.
Remember that when you close a position, you are taking the opposite side of the trade.
If you close your EUR/USD long trade at or around breakeven, you must short the EUR/USD by the same amount.
If sufficient selling and liquidation of losing positions occurs at the broken support level, the price will reverse and begin to decline again.
This is the primary reason that when a support level breaks, it becomes a resistance level.
As you can expect, taking advantage of this occurrence requires patience.
Instead of entering immediately after the break, wait for the price to “pullback” to the broken support or resistance level before entering.