If you are familiar with Forex trading, then you would know that the execution of currency pairs relies on supply and demand. As the essential part of Technical Forex analysis, support and resistance levels play an important role in reflecting the relations between supply and demand and implying the market trend. It is one of the most important issues for trader to figure out that whether the price would bounce or break a certain level in order to determine whether they should enter a trade or not. Today I would like to discuss how to trade the bounce and the break of support and resistance levels to make your technical Forex trading better.
Part 1: Trading with the bounce
As we have mentioned, trading support and resistance levels can be divided into two primary methods: the bounce and the break. Many forex traders set their orders directly on the support and resistance levels and then wait to benefit from it. Although it might work sometimes but this might be still a typical dangerous approach since a support or resistance level might not hold before the price reaches there yet.
When trading with the bounce, it is better for traders to seek the confirmation that the support or resistance would hold first. Traders need to be patient and wait for the price to bounce first before entering the trade, instead of placing orders right on the support or resistance levels. In this way, traders can minimize the possibility to experience the moments that price changes rapidly and break through the support and resistance levels, which could lead to severe loss.
Part 2: Trading with the break
Actually support and resistance levels won’t hold forever. As a matter of fact, these levels are easily broken out, which offers traders good opportunities to obtain profits. Therefore it is not enough for traders to only trade with bounces; traders also need to learn trading with breaks in a either aggressive or conservative way. In the common aggressive way, traders might just simply make their trades when the price passes convincingly through a support or resistance area, like what it shows in the following chart.
We know when the price breaks the support level for example; sometimes it might bounces back to the broken support level. However if sufficient selling and liquidation of losing positions occur at the broken support level, the price will reverse and start to fall again, which makes broken support levels become resistance. Therefore, traders might wait for a pullback of price action to the broken support or resistance level and then enter after price bounces in the conservative way.
How to determine a bounce or break of support and resistance levels?
Therefore, how should we determine a bounce or break of support and resistance levels in Technical Forex analysis?
First of all, traders may look at the candlesticks on the chart. If the candles you see are relatively small, then it means there are less momentum temporarily in the market. In other words, it is unlikely for price to break through the support and resistance levels with these small candlesticks around. Usually larger candlesticks indicate trend to carry through a level.
Secondly, topping tails near resistance levels indicate selling pressure and signal reversals in most of the time. Bottom tails near support levels also indicator buying pressure and makes for reversals as well.
Lastly, usually in order to break through the support and resistance levels, traders would expect to witness the increasing volume of forex trades to carry through a level. However, an increasing volume of forex trades might be also a sign of reversal so traders need to pay more attention to it when making Technical Forex analysis before entering a trade.