Why are support and resistance levels crucial when participating in the Forex day trading market?
Simply put, they represent key, strategic price points at which traders processed orders involving millions or even billions of dollars. No wonder price at times has a hard time getting past a previous high or low. Those levels are being fiercely defended by traders who have large amounts of money at stake and who do not want to see price break those levels.
For this reason anyone who engages in Forex day trading should learn how to trade support and resistance. The following checklist provides crucial guidelines:
1. Support and resistance levels are much more significant on the higher time frames. Pay particular attention to price highs and lows on the daily chart as this time frame is commonly used by big traders.
2. A price high or low has more significance when it has a number of candles either side of it which are lower (in the case of a price high) or higher (in the case of a price low).
3. Before you consider Forex day trading at a support or resistance level, see if there are more factors that would indicate this is a key price level.
For example, does a trendline intersect at the same point? Does the support or resistance line match up with a Fibonacci level, either a retracement or an extension? Does the support or resistance level coincide with a pivot point if you are in the practice (and it’s a wise one) of calculating pivot levels when Forex day trading?
4. Has a key support resistance level been broken? Then look to see if price will come back to test that level. Remember, resistance once broken can become support in the future and support once broken can become resistance in the future.
These Forex day trading scenarios can present excellent trading opportunities as you put an entry order in at the key level and wait for price to come back and pull you in. Within a short time your dealing spread is covered and you are in profit.
5. The market spends most of its time in trading ranges or consolidation channels. You need to accept that this is a characteristic of Forex day trading and adjust your mindset accordingly. Identify the high and low of the trading channel and manage your trades accordingly.
6. After identifying a trading channel or range and you see a trading opportunity, set your entry level at the base of the channel if you are going long or at the top of the channel if you are going short.
Don’t chase after price once it breaks out of the channel (although many who engage in Forex day trading do so). You will not get the optimal entry point. Waiting for price to take you in either at the top or bottom of the channel means you can have a smaller stop and your price target is closer.
7. Pay particular attention to the previous day’s high and low. Price will often hesitate and retrace at these levels. If you are a Forex day trading scalper, you can often grab a nice pull back of 10 pips or more at these strategic levels.
Note: Although there are various ways to calculate the previous 24 hour period depending on where you live, using GMT as a standard is often beneficial. Midnight GMT is a time when the market is generally very quiet and unlikely to make new highs or lows.
Succeed Or Fail?
It is unlikely you will succeed at Forex day trading if you fail to understand or take into consideration support and resistance. This indicator is that crucial! Yes there may be fancy indicators out there with all the bells and whistles, but this simple indicator, marking where price reached a high or low during previous trading sessions, can be one of the most powerful and effective Forex day trading tools available.
Be sure you spend sufficient time studying it, examining your charts, marking off the key levels each time you begin a new Forex day trading session.
Article written by Michael A. Jones