One of the toughest skills in Forex trading to master is the art of entering and exiting a trade.
While the challenge is to do this at the best point to maximise your profits, it’s not an easy thing to do and there are quite a few different methods that can be used to attempt it. But for now, I want you to forget whatever technical indicators you use to enter and exit and consider this as food for thought.
This runs on somewhat from our previous article on fundamental analysis, and how you can use it to determine future price direction. As you’ll remember from that article, it’s nothing more than a method of interpreting world events.
If you have a decent ability in predicting price direction, it’s beneficial to hone your skills in entering and exiting these trades. In a nutshell, we’re going to talk about using support and resistance as your method of entry and exiting.
To break it down as simply as possible, support and resistance are key levels of a currency pair. They are psychological areas that are determined by the Forex market as whole.
Support is the lowest level of price over a given timeframe, think of it like a floor. Typically, as price reaches these levels we see an increase interest in traders buying, or going long, that particular Forex pair.
Resistance is simply the opposite of support, making it the highest level of price over a given timeframe. We refer to this as the price ceiling. As price approaches these levels we tend to see an increase in selling interest, or going short.
What’s interesting about support and resistance levels, is that when they’re broken by price, it presents a significant opportunity to enter or exit a trade. Often these breakouts occur in tandem with the underlying fundamentals of a currency, country, or event.
One of the best things about trading support and resistance is that you need nothing more than a simple price chart. No indicators, just a chart and your horizontal line tool.
An example of trading to the long side
First, you need to determine the direction for your trade using a combination of fundamental analysis and consider where your support and resistance levels are.
Enter the trade when price pulls back to your levels of support.
Take profit just prior to price reaching the resistance levels you’ve identified. This could be a swing high or round number level (eg. 132.00)
For trading short, the method is simply inverted.
It can take some practice to identify areas of support and resistance, but like most things it’s best to try and keep trading simple and clear. And support and resistance levels are a very simple concept that’s widely used by professional Forex traders. Try and have a go on a demo account and see how you go at identifying potential turning points in the market, you’ll be surprised at how powerful they are.
Source: Vantage FX Blog