Trading Support and Resistance.

Let’s examine more on trading support and resistance.

The Break

In a perfect world, support and resistance levels would hold forever, politicians would never lie, McDonald’s would be healthy, and we’d all have jetpacks.

In a perfect forex trading world, we could just jump in and out whenever the price hits those major support and resistance levels and earn loads of money.

The fact of the matter is that these levels break… often.

So, it’s not enough to just play bounces. You should also know what to do whenever support and resistance levels give way!

There are two ways to play breaks in trading: the aggressive way or the conservative way.

The Aggressive Way

The simplest way to play breakouts is to buy or sell whenever the price passes convincingly through a support or resistance zone.

The keyword here is convincing because we only want to enter when the price passes through a significant support or resistance level with ease.

We want the support or resistance area to act as if it just received a Chuck Norris karate chop: We want it to wilt over in pain as price breaks right through it.

The Conservative Way

Imagine this hypothetical situation: you decided to go long EUR/USD hoping it would rise after bouncing from a support level.

Soon after, support breaks and you are now holding on to a losing position, with your account balance slowly falling.

Do you…

A. Accept defeat, get the heck out, and liquidate your position?

or

B. Hold on to your trade and hope the price rises up again?

If your choice is the second one, then you will easily understand this type of trading method.

Remember, whenever you close out a position, you take the opposite side of the trade.

Closing your EUR/USD long trade at or near breakeven means you will have to short the EUR/USD by the same amount.

Now, if enough selling and liquidation of losing positions happen at the broken support level, the price will reverse and start falling again.

This phenomenon is the main reason why a broken support level becomes a resistance level whenever it breaks.

As you would’ve guessed, taking advantage of this phenomenon is all about being patient.

Instead of entering right on the break, wait for the price to make a “pullback” to the broken support or resistance level, and enter after the price bounces.

A few words of caution… IN FOREX, THIS DOES NOT HAPPEN ALL THE TIME. “RETESTS” OF BROKEN SUPPORT AND RESISTANCE LEVELS DO NOT HAPPEN ALL THE TIME. THERE WILL BE TIMES THAT PRICE WILL JUST MOVE IN ONE DIRECTION AND LEAVE YOU BEHIND. BECAUSE OF THIS, ALWAYS USE STOP LOSS ORDERS AND NEVER EVER HOLD ON TO A TRADE JUST BECAUSE OF HOPE.

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