How to Use Support and Resistance to Make Great Profits
Price charts, whether they involve stock or a Forex/currency pair, often show the last stalling points of prices. Resistance is a point on the chart beyond which prices can’t get or ‘resist’ to get higher. If prices can’t get low beyond a point, that point is referred to as the support.
Resistance and support indicate the points where the prices last stopped at their highs and lows respectively. That level may hold as prices keep moving forming a channel (consolidate) but that’s not always the case. The longer this consolidation goes on, the stronger the chance for the prices to breakout to new highs or lows.
In trading, more so day trading, you can use resistance and support in more than one way to quickly enter and exit trades with small gains without dealing with the risks that come with a whole move. This is only possible if we change the old perception we have about support and resistance.
First, start viewing support and resistance as points of entry and exit that are subject to abrupt movements or breakouts in either direction. Since the movement solely relies on probability, don’t conceive your own notions about the two points. Let’s take the movement of prices towards the resistance for example. Normally, movements above the resistance would mean BUY, so you would place a stop slightly below the resistance. In case the levels disobey your projections and instead gets lower, you can decide to place a stop at a point slightly above the previous resistance level. This way, you are said to be trading based on the market offer, not guesswork.
When trading a currency pair that is consolidating, keep a close eye to increased volume as it may signify an impending breakout with prices shooting through the resistance or support lines and starting a trend in that direction. Comparatively, slow prices creeping towards either level signify low volumes and lack of interest. For instance, rapid movement and lack of volume at the resistance means it won’t breakout easily, hence a short trade will be appropriate. Always look out for these scenarios.
Volume and prices tend to move most at the open of the market. So breakouts are more likely around this time although you need to adhere to the rule of stay away the first 15 minutes after the major markets open and trade the developing trend afterwards. Breakouts are rare during lunchtime due to the drop in movement and low volume. So a resistance or support resistance will be expected although one or two wild false breakouts are still possible.
In case prices begin moving erratically back and forth, just sit back and don’t trade. Instead, consider examining the high and low created by the back and forth movement and capitalize on it by putting the above trick to practice.
Therefore, keep in mind that the time of the day has an influence on the movement behavior. Besides, remember to make sure that there is interest and volume in the currency pair you want to trade.