As every serious trader knows Forex trading strategies are an essential part of Forex training. They range from reversal through to continuation strategies with each one having its own specific set of rules, entry and exit points. Knowing how these Forex trading strategies work and when they are most likely to fail is a core element of the learning process for any aspiring new trader.
Another crucial element of Forex training is the notion of support and resistance. They re defined as follows:
Support – a price area where a horizontal line is drawn connecting two price hits which have bounced in the upwards direction. Market price is decreasing when suddenly it starts to pull back upwards. It then decreases again with another pull back at the same price level as the first one. The horizontal line that connects the two pull back price points is called the support line. The line literally creates support for that particular price level.
Resistance – a price area where a horizontal line is drawn connecting two price levels which have bounced in the downward direction. Market price is increasing thus moving upwards; but suddenly it starts to pull back in the downwards direction. It then reverses back into the original upward direction only to pull back downwards at the same price point as the first one. The horizontal line that connects the two price points is called the resistance line. It creates a resistance point at which the market cannot continue upwards.
The reason why it is crucial to know about support and resistance is because they can drastically slow down your profits or even reverse your Forex trading strategies back to create a loss. The point is that there is a reason why there is support or resistance at a certain price level. It does not matter what this reason is. What is important is that traders respect it as a potential profit stop. So, if a profit target is 30 pips but there is a heavy support/resistance line blocking the way at 25 pips, profit should be taken at 25 pips. If orders are left to fight the support/resistance lines you are simply hoping for the best. You may get through some of them but in the long-run it is not worth the wait.
Another factor to bear in mind is that support can become resistance and resistance can become support. For example, as price breaks through resistance whilst moving upwards it is very common to see the price pull back to the line it broke through originally and bounce back upwards as a result. In this manner historical resistance has now become new support. The same can happen in the other direction.
In summary, it pays to be extra careful when support or resistance lines are apparent in the market when Forex trading strategies are being used. It is common for a trader to lose faith in his/her strategy when they see it bounce from this horizontal line simply because they haven’t studied it in their Forex training. In this instance it is not the strategy that is at fault, it is the lack of knowledge.