Trading At Support And Resistance Levels

The main enemy of knowledge is not ignorance, but the illusion of knowledge.

Stephen Hawking

In this article, we will review a fundamental strategy that, if not used, but is surely heard by each of the traders – trading at support and resistance levels. Despite its well-known status, it’s never too late to look at the phenomenon from a different angle, with a fresh look.

 

What is a trading system?

The trading system is our weapon, with the help of which we hunt for our prey – profit, and also repel attacks of our enemies – losses. A weapon must constantly change, improve, become better. Over the past millennium, the evolution of weapons is amazing: from stones and sticks to modern missiles without limitation of range (within the globe) moving along non-ballistic trajectories… A trader who wants to achieve success should also move forward, hone his professional skills, constantly work on improving his personal trading system.

A worthy tip: I do this every week. I choose a quiet time, suitable for reflection, carefully (as if for the first time) I re-read the description of my trading system (just a couple of pages). I remove not working (or ineffective) elements, and I bring what has proved the right to existence. Try it.

 

Recalling the terms and definitions

In dozens of textbooks on Forex trading we will meet many terms of support and resistance levels as well as hundreds of graphs explaining these concepts. Respecting the readers, we assume they already have a basic knowledge of the topic, therefore we won’t consider these elementary truths for the hundredth time.

I like a nonstandard definition, from the book “Way of the Turtle” by the legendary trader Curtis Feys, who is a pupil of another famous investor Richard Dennis (a man who shockingly extended his trading account from $400 to $200,000,000). For about twenty years, this information was not disclosed (a so-called “moratorium on silence” was signed by the participants of the experiment, who found themselves in the history of trading as Turtles). Now this information is public, so you can freely make use of it to earn in the Forex market. As Curtis Faith states, both support and resistance should be regarded as the tendency of prices not to exceed the previous levels. Support and resistance are the result of market behavior. There’s one more observation in the same book: support and resistance are a more general assumption than a rigid rule. There is no guarantee that prices will leave the previous high and low –it’s only a general rule. Sometimes it happens that the price reacts earlier or later, sometimes there is no reaction at all.

 

The main myth of trading

Very often, newcomers at the beginning of their professional career in this dangerous, but extremely interesting world of Forex trading are at the mercy of myths about professional traders. They think that professional traders are super creatures, who own sacred knowledge, they’re as intelligent as Nobel laureates, and they’re used to sitting behind six monitors, closely watching a bunch of secret (very complex and correspondingly expensive) indicators that accurately predict the beginning and the end of any trend. Alternatively, they’re believed to employ a secret and extremely profitable automatic trading system (a trading robot), which works for them.

It’s a pure nonsense. Our personal experience suggests that a professional trader is the one who didn’t give up. He went through periods of failures and losses and he or she learned what he or she could not. As a result, such a trader has acquired the most valuable thing – experience.

About trading robots Bill Williams in the book “Way of the Turtle” told that if there was an automatic trading system, steadily profitable in any markets, then it would be rented out, for no less than $30,000,000 per hour. Since the writing of the book, a good deal of time has passed, inflation has never stood still, so let us correct the respected author. Today, we would have estimated the hypothetical cost of an hourly rental of a profitable trading robot at already $50,000,000. The only question is that there is nothing like this in the world, and most probably it will never show up.

 

The magic of round figures

The crowd of ordinary people and the crowd in the international financial markets thinks surprisingly the same. It’s typical to any person to cling to round figures. For example, we all know the old trick with the sale of goods for 99.99. In the financial markets, exactly round numbers of quotes become strong support/resistance levels. Have a look – for the currency pair EUR/USD, the values of the exchange rate of 1.21500, 1.22000, 1.22500, 1.23000, 1.23500, 1.24000, 1.24500 in March of this year – were either support or resistance, or the price passed through them powerfully.

Trading at support and resistance levels

 

Trading at support and resistance levels

Buying the Call option

1.Study the extended chart of the selected option (currency).

2.In the chart you should mark the horizontal lines of the support levels, as well as the round figures of the price values.

3.At a rebound of the price from the support you have identified you require buying a Call option.

Trading at support and resistance levels. Buying the Call option

Buying the Put option

1.Study the extended chart of the selected option (currency).

2.Mark the resistance levels on the chart with horizontal lines and specify the round figures of the price values.

3.At a rebound of the price from the resistance set by you, just purchase a Put option.

Trading at support and resistance levels. Buying the Put option

 

Tips on trading at support and resistance levels

You shouldn’t become a prisoner of these levels, which only exist in your imagination. Do not get caught up in the mental dependence on simple horizontal lines drawn by you (or not by you).

The levels that you see are clearly observed by millions of traders around the world. It can be used and it should be used. Your desire to defeat the market with your rightness and the desire of yours to be cleverer than everyone can’t bring you the desired outcome, to put it mildly.  It’s like trying to stop a truck rushing at a speed of 100 km/h, because you are “right” and the truck is “wrong.” For example, you forecast a rebound from a certain level, but the price passes through it for a second, as if not noticing it – that’s OK. Just join the powerful market movement and make money on it.

Always pay attention to the round numbers. Look, with all its simplicity, this method is surprisingly effective. If you have a long position, confidently going up, then most probably at the next round figure the price will rebound. Similarly, with short positions – the next round figure on the way down can play the role of support, and the price can soar.

 

Examples of trading at support and resistance levels at the Finmax broker

Buy the Call option in the trading terminal of the Finmax broker by doing the following: go to finmaxbo.com and select the option, specifying:

  • Asset: USD/JPY
  • Expiration (time): 15 minutes
  • Bid in the amount of: $25
  • Quotation direction forecast: UP
  • Click “Buy” and follow the final results.

Examples of trading at support and resistance levels at the Finmax broker

Buy the Put option in the trading terminal Finmax by following the steps: go to finmaxbo.com and select the option, spcifying:

  • Asset: GBP/USD
  • Expiration (time): 10 minutes
  • Bid in the amount of: $50
  • Quotation direction forecast: DOWN
  • Click “Buy” and follow the final results.

Examples of trading at support and resistance levels at the Finmax broker

 

Risk management

Don’t try to seem who you are not. If you don’t manage a billion-dollar capital of a large hedge fund, but you trade using your own funds (for example, $1,000), then you should open positions in accordance with the size of your trading account. Be more modest. A market is not a game – it’s a serious job that requires respect.


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