Making the Most Of Support And Resistance

One of the most valuable strategies for trading the Forex markets is also one of the simplest; understanding key resistance and support levels in the market you have chosen. Because currencies move in relatively stable increments outside of major events, when they begin to reach historic levels, either to the upside or downside, it can give traders pause for thought.

So what are resistance and support levels and how can they help your Forex trading?

A support level is essentially the downward price at which a currency will pause or stop its decline as demand or trading volume begins to increase again. On the other hand, resistance levels indicate a high price level at which the market begins to believe a currency may be overvalued and it could be a strong indicator of a potential sell-off in the near future. Both support and resistance levels are useful as part of your overall Forex trading strategy in understanding potential market entry and exit points. To help you identify key support and resistance levels in your chosen FX market, we have a number of tools for you to use. You can take advantage of our indicators like MACD, RSI and Bollinger Bands, add your own indicators or use our drawing tools to define key market levels you’d like to monitor. In addition, you may find it useful to set up a customisable Forex Watch list so that you can track a number of price changes across the FX pairs that most interest you or that could have an impact on your trading strategy. Rather, you are trading on price movements within the underlying market.

Day Trading

Because of the high volume of global trades within the Forex market, as well as their relative sensitivity to events and various market correlations, there can be numerous shorter-term trading opportunities. A Day Trading strategy may suit your approach to FX trading if you aim to take advantage of market volatility over the short term, perhaps for a period of a few hours rather than weeks or months.

Day traders will generally identify current market trends and prevailing sentiment and trade in the same direction until a support or resistance level is reached. Once their profit target has been reached, or their stop loss order triggered, their position will be closed. Day trading can be a very intensive approach to trading the markets and requires a very strong risk management strategy, plenty of time so that you can react to fast moving market events and a solid understanding of your chosen market. 

If you decide on a Day Trading approach make sure that you use our smart risk management tools like Guaranteed Stop Losses to protect yourself against volatility should the market move against you.

Understanding Market Correlations

Forex markets are impacted by a number of wide-ranging factors and because currencies form the basis of trade, economic relationships and financial services, there are a number of closely interconnected market correlations between FX prices and other, related markets.

These correlations depend on which particular currency you decide to trade as some economies are modelled on different strengths. For example, the value of the Canadian dollar (CAD) and Australian dollar (AUD) are strongly influenced by commodities prices in these countries as a large percentage of their GDP comes from natural resources and mining. Similarly, the US dollar is particularly sensitive to movements on Wall Street, as the index drives huge growth and revenue.

Understanding market correlations between your chosen currency and other, related markets can help you make better trading decisions. Make sure you do as much research as possible and work to understand how and why changes in other markets could impact your FX trading.

Don’t give up

Finally, provided that you risk only what you can afford to lose, persistence, and a determination to succeed are great advantages. It is highly unlikely that you will become a trading genius overnight, so it is only sensible to wait the ripening of your skills, and the development of your talents before giving up. As long as the learning process is painless, as long as the amounts that you risk do not derail your plans about the future and your life in general, the pains of the learning process will be harmless.

Study the markets, fundamentals, and technical factors leading the price action

That we have placed this so low in the list should not surprise the experienced trader. Faulty analysis is rarely the cause of a wiped-out account. A career that fails to begin is never killed by the consequences of erroneous application or understanding of fundamental or technical studies. Other issues that are related to money management and emotional control are far more important than analysis for the beginner, but as those issues are overcome, and steady gains are realized, the edge gained by successful analysis of the markets will be invaluable. Analysis is important, but only after a proper attitude to trading and risk taking is attained.

Study money management

Once we make profits, it is time to protect them. Money management is about the minimization of losses, and maximization of profits. To ensure that you don’t gamble away your hard-earned profits, to “cut your losses short, and let profits ride”, you should keep the bible of money management as the centerpiece of your trading library at all times.

Share your experiences. Follow your own judgment

While it is a great idea to discuss your opinion on the markets with others, you should be the one making the decisions. Consider the opinions of others, but make your own choices. It is your money after all.

Be humble and patient. Do not fight the markets

Recognize your failures, and try to accommodate them if they can’t be eliminated completely. Above all, resist the illusion that you somehow possess the alchemist’s stone of trading. Such an attitude will surely be ruinous on your career eventually.

Understand that forex is about probabilities

Forex is all about risk analysis and probability. There is no single method or style that will generate profits all the time. The key to success is positioning ourselves in such a way that the losses are harmless, while the profits are multiplied. Such a positioning is only possible by managing our risk allocations in accordance with an understanding of probability and risk management.

Don’t go against the markets, unless you have enough patience and financial resilience to stick to a long term plan

In general, a beginner is never advised to trade against trends, or to pick tops and bottoms by betting against the main forces of market momentum. Join the trends so that your mind can relax. Fight the trends, and constant stress and fear will wreck your career.