Now is the time for you to apply the previously learned basic technical instruments into real trading.
At BabyPips.com, we want to make things easy to understand, we have divided the implementation of support and resistance into two ways: Bounce and Break.
Bounce (bouncing price)
As the name suggests, one of the price actions at the resistance level is a bounce.
Many retail traders make the mistake of placing an order right at the support or resistance line, then just waiting for the price forecast to materialize.
Sure, this method works sometimes but this kind of trading method assumes that the support or resistance level will stay and the price hasn't really arrived there yet.
You may be thinking, “Why not just enter the order right away? that way, I am guaranteed the best price.”
When the price bounces, we want a profitable opportunity on our side and confirm that the support or resistance will hold.
For example, instead of executing immediately, what we want is for the price to be “bounced” before entering the market.
If you want to sell, wait for the price to bounce slightly from the resistance before entering.
By doing this, you avoid times where the price moves quickly and breaks a support or resistance level.
Break (break price)
In the perfect world of forex trading, traders can enter and exit at any time when prices touch key support and resistance levels and make a lot of money.
The fact is that prices often break through subsequent support and resistance levels.
So, it is not enough just to look at the “Bounce” price. You should also know what to do whenever support and resistance levels run!
There are two ways to execute on a price break: do it aggressively or conservatively.
Aggressive way
The way to execute on a break is to immediately buy or sell every time the price crosses a definite support or resistance zone.
The key is to be sure, because we only enter when the price has crossed a significant level of support or resistance.
Conservative way
Imagine a situation where you decide to buy EUR/USD, hoping the price will rise after “bouncing” from a support level.
But then, the support level was broken and you are now in a losing position with a reduced account balance.
What are you doing?
A. Accept defeat, stop immediately and liquidate the position.
B. Hold on to the order in the hope that the price will rise again.
If you choose the second one, then you will understand this forex trading method better.
Remember! every time you close a position, you take the opposite side of your initial trade.
Closing a long EUR/USD position near the break-even point means that you have to take a short EUR/USD position for the same amount.
Then, if there is sufficient selling and liquidation of the lost positions occurs at the broken support level, the price will reverse and will start falling again.
This phenomenon is the main reason why a broken support level becomes resistance.
The key to taking advantage of this phenomenon is to be patient.
Instead of going straight into the moment of breaking the price, it is better to wait for the price to "pull back" to the initial support or resistance level, then enter after the price "mental" returns.
REMEMBER! REMEMBER! REMEMBER! IN TRADING, THE RETESTING OF THE SUPPORT AND RESISTANCE LEVEL BROKEN DOES NOT HAPPEN AT ANY TIME. THERE ARE TIMES WHICH PRICE WILL ONLY MOVE IN ONE WAY. SO ALWAYS USE STOP-LOSS AND NEVER STAY IN A POSITION WITH "HOPE" CAPITAL ONLY. OK!!! GOOD JOB!!!