Now that you know the basics, it’s time to apply these basic but extremely useful technical tools in your trading.
Because here at BabyPips.com we want to make things easy to understand, we have divided how to trade support and resistance levels into two simple ideas: the Bounce and the Break.
In the previous lessons, you’ve learned about trading support and resistance.
Let’s review what you’ve learned.
When the market moves up and then pulls back, the highest point reached before it pulls back is now resistance.
As the market continues up again, the lowest point reached before it climbs back up is now support.
Support and Resistance are Zones
One thing to remember is that support and resistance levels are usually not exact numbers.
To help you filter out these false breakouts, you should think of support and resistance more of as “zones” rather than concrete numbers.
One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart.
Support and Resistance Can Reverse Roles
Another thing to remember is that when price passes through a resistance level, that resistance could potentially become support.
The same could also happen with a support level. If a support level is broken, it could potentially become a resistance level
This concept is known as “role reversal“.
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys).
In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks)
There are three types of trends:
- Uptrend (higher lows)
- Downtrend (lower highs)
- Sideways trends (ranging or flat)
There are three types of trend channels:
- Ascending channel (higher highs and higher lows)
- Descending channel (lower highers and lower lows)
- Horizontal channel (ranging)
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to a position where it touches the most recent peak.
To create a down (descending) channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley
To create a sideways (horizontal) channel, simply draw a parallel line at a zero or flat angle.
How to Trade Support and Resistance
Trading support and resistance levels can be divided into two methods
- The “bounce”
- The “break”
When trading the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold.
Instead of simply buying or selling right off the bat, wait for it to bounce first before entering.
By doing this, you avoid those moments where price moves so fast that it slices through support and resistance levels like a knife slicing through warm butter.
Or your warm hand.
As for trading the break, there is an aggressive way and there is a conservative way.
In the aggressive way, you simply buy or sell whenever the price passes through a support or resistance zone with ease.
In the conservative way, you wait for the price to make a “pullback” to the broken support or resistance level and enter after price bounces.