Forex Trading: Support and Resistance

In the trading of the forex market,w e established early on that the only real way to trade it profitably is with the longer term trend. Trade In the direction of the trend, and become a specialist in one currency. Learn it's movements, it's quiet times, it's volatile news releases...everything you can about it.

But also remember, learning everything you can about a currency and it's actions and reactions isn't a 30 day process. It isn't a 90 day process. Give yourself a year minimum of studying it every day. Certainly use historical charts, but you have to be trading it on a regular basis to get a good feel for the pair. And you have to use real money. Demo accounts only help people think they are good traders. There is no way to account for the real fear and greed that fills a traders heart when his own cash is on the line.

So having established that trading with the trend is the only way to go, the next thing that is crucial to remember is that you don't want to try to get in on the beginning of a trend. It is next to impossible to find when a currency turns a corner (except in hindsight when it looks so easy), so always let your trend establish itself before entering.

Once the trend is underway, the next logical question is that of when and where to enter. For the answer, we will look to support and resistance. If the trend is down, we want to enter at resistance. If it is up, we want to enter at support.

For instance, our recent sterling trade is short, as you can plainly see the direction on any weekly chart of the GBP/USD. Recently we came up to a weekly resistance level. This provides a reasonable place to enter, as the resistance is strong and well established. Where will it go from here? No one knows. That's why you always have a contingency in play. Either a stop loss, an offsetting trade as a hedge, another entry at the next resistance level, something to expand your advantage in the market.

But what is the best kind of support or resistance? And how many are there? Let's see:
Horizontal S/R
Diagonal S/R
Fibonacci S/R
Big Figure S/R
Old Resistance/New support
New Resistance/Old Support

Each of these deserves a decent treatment, and we have talked about some of this before. But it always bears repeating! For slower markets, I prefer horizontal S/R. For faster markets, I prefer angled trendlines. For breakout markets, I like the Fibonacci grids. For profit targets, I like the big figures. All this has come to me over years of trading trial and error. And especially narrowing down my trading to certain pairs. It is no secret that I like the euro, pound and aussie.

Study your support and resistance levels for your preferred currencies. You are nearly guaranteed to fail without this knowledge in your arsenal. But don't simply rely on back testing, that can only do so much. You have to put the trading plan it work in real time in real markets with real money. Just keep your leverage small until you have the experience you need to feel comfortable. Even then, don't get too comfortable. The market is like a pet lion...there's always a ferociousness just below the surface. And if you are careless, it will get you.

Also, remember this as a practical point. Support and resistance is not at a "pip". It's at a range. So if a swing high is established at a certain point, remember that the market may respect that, but will probably only due so within a certain range. If your swing high is 1.5100, and you put a stop loss at 1.5101, you haven't really given the resistance level the respect it deserves. You probably need 25 pips or more, in the case of overshooting for which the market is famous. So don't try to get your S/R down to the pip. A 50 pip range or level is better.

Happy Trading!

Bill
www.thefxtradingmasters.com
bill@thefxtradingmasters.com