Now it’s time to learn how to trade support and resistance zones.
This is indeed a basic lesson in technical analysis, but it is very useful for forex and CFD trading as well as crypto trading.
You can use this method for all types of markets, stocks or foreign exchange, and also the crypto market.
Now, we continue to learn some strategies for capturing market opportunities based on the basics of analysis that have been studied previously based on support and resistance.
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Type strategy support and resistance
Basically, there are two strategies that you can apply based on support and resistance.
- The first is called bounce trading,
- The second is called breakout trading.
Alright, we will review them one by one.
Bounce trading strategy
This trading method utilizes price reflections when prices reach support or resistance, and bounce from there.
Most traders’ mistake is to place orders in the support and resistance areas, then wait for prices to reach their targets.
Of course, this way one day will work, assuming that the price will not break support and resistance.
Indeed by placing an order on the support or resistance line, you will assume that this is the best price.
But with this bounce trading strategy is to ensure that the area of support or resistance is really strong as a price barrier.
In the image below you will understand from the illustration how to trade using a bounce strategy.
The image above is a way to determine buy orders on a bounce trading strategy.
While the way to determine sell orders on a bounce trading strategy is the opposite of how to buy trade on a bounce trading strategy, the illustration is as shown below.
How to trade support and resistance zones is essentially you wait for a reflection from the area of support or resistance to trade.
Why not sell right at the resistance or buy right at the support?
Because you need some kind of confirmation that the support or resistance is not yet translucent.
It could be that the price movements go up or down so sharp and fast that it immediately breaks through support or resistance.
Well, this reflection is a kind of sign that the support or resistance level is still strong.
By waiting for the price to bounce, the risk will be smaller than placing an order on the support or resistance line.
As people experience, catching a falling knife can make you bleed, waiting to bounce is lower risk.
Breakout trading strategy
In the forex trading, support and resistance will not always be a barrier to hold price.
At one time these levels will definitely a breakout, even often.
At such times you can still try to look for opportunities with a strategy called breakout trading that is very different from bounce trading.
If on the bounce trading strategy you wait for prices to bounce to buy or sell.
In the breakout strategy, you take advantage of the break of support and resistance with the assumption that a break of the support or resistance tends to be followed by a rally.
The illustration below illustrates a breakout trading strategy by utilizing a break of support or resistance.
Breakout trading strategy itself is divided into two types of traders
- Aggressive trader.
- Conservative trader.
The explanation is
Aggressive traders who trade with their strategy breakout will immediately open a position after getting confirmation of a break of the support or resistance level.
To perform this action requires confirmation.
A support or resistance is considered as valid breakout if it fulfills at least one of the following two things.
- First, if you use a candlestick chart, the body of the candlestick must break the support or resistance line.
- Second, when a breakout occurs, an increase in volume occurs. The more significant increase in volume, the breakout is considered more valid.
Take a look image below, it’s example candlestick chart as a valid and false breakout.
These non-aggressive traders apply a rather conservative breakout strategy, they are conservative traders.
To make it easier, let’s just call them to use a conservative breakout strategy.
Then, how does this conservative strategy work?
This conservative breakout strategy actually combines breakout and bounce trading strategies.
The understanding is that when a breakout has occurred, you do not immediately take a buy or sell position like a breakout strategy by aggressive traders.
But you are waiting for a pullback to return to the support or resistance area.
After a pullback occurs, you wait for the price to bounce back from that support or resistance level.
Then you do a short or long transaction.
To make it easier for you to understand, the image below is a conservative trader illustration.
Aggressive trader vs conservative trader, which is best
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Both aggressive and conservative breakout strategies have their advantages and disadvantages.
If you use an aggressive breakout strategy, the advantage is that you can immediately enter and not miss the momentum.
But of course, this strategy has shortcomings.
For example, you have to open a sell position immediately when the support breaks, but in fact, the price goes up again and back above the support earlier.
This weakness is minimized in traders who implement a conservative way.
By using a conservative strategy, you are less likely to get stuck because you are waiting for a pullback first and looking for price confirmation to bounce.
However, it should be noted that pullbacks do not always occur after a breakout.
Such conditions are a weakness for traders who implement conservative strategies, you will potentially lose the opportunity for entry because the price has already moved far.
So which the best? Aggressive or conservative way?
Every trader has a different style.
You get the freedom to decide to be an aggressive trader or become a conservative trader.
If you are a patient trader, a conservative strategy might be suitable for you to apply.
But if you are an agile person and like a challenge, it might be better to use an aggressive strategy.
Support and Resistance trading summarized
Let us try to summarize trading support and resistance after we study all the material in the support and resistance lessons.
What is resistance? when prices move up then prices bounce back, then the highest point of the price is resistance.
What is the support? When prices move down then bounce back, the lowest price is a support point.
One important thing to note is that horizontal lines of support and resistance are not exact numbers.
To filter out false breaks in support and resistance, you can apply this area as a zone rather than a concrete number.
One way to create support and resistance zones is to use a line chart, rather than using a candlestick chart.
Something else to keep in mind is that when the resistance area is broken by price, it has the potential to become a new support area.
Conversely, if the support area is broken by the price, it has the potential to become a new resistance area.
Trend lines trading summarized
In its basic form, the trend line drawn on the uptrend is the support area or valley.
Conversely, the trend line drawn on the downtrend is the resistance area or peak.
Trend lines can be used to draw on three types of trends.
- Uptrends (higher lows).
- Downtrend (lower highs).
- Sideways trends (ranging).
Channels trading summarized
To create up channels is to draw parallel lines at the same angle as the uptrend line and then move the line to the position where it touched the latest peak.
Conversely, to create down channels is to draw a parallel line at the same angle as the downtrend line and then move the line to the position where it touched the most recent valley.
Line channels are divided into three types
- Ascending channels with higher highs and higher lows.
- Descending channels with lower highers and lower lows.
- Horizontal channel with a ranging market condition.
Trading support and resistance zones are divided into two ways, bounce trading and breakout trading.
Bounce trading strategy by waiting for prices to bounce in the support or resistance area, instead of this to avoid if price breaks in that area
In the breakout trading strategy, there are traders who use aggressive and conservative ways.
A trader who uses an aggressive method will shoot when the price has broken the support or resistance area.
Traders who use conservative methods will wait for prices to bounce after a break in the support or resistance area.
Waiting for this pullback will be lower risk, but the weakness of pullback does not always occur.
How to trade support and resistance is a basic lesson in forex trading that all traders should understand this concept.
Indeed the area of support and resistance is not an exact number to define the area, but more precisely if this area of support and resistance is a zone.
There are various ways to find or find this support and resistance, so each trader may find a different area for this support and resistance.
To choose which way to determine the area of support and resistance all decisions will back to each trader.
If it matches using the trend line, this is also good for traders, but if it matches the channel line or with Fibonacci, this is also a popular method among traders.
The most important thing is to apply in how to trade support and resistance it by always being disciplined in maintaining risk management, by using stop loss and position size in accordance with the amount of capital in a trading account.