How to Trade Forex With Support and Resistance

Of course there are hundreds of articles on the internet about how to trade forex, and how to make money trading forex. Unfortunately, however, many of them are written by marketers or brokers trying to attract more clients, or sell forex trading as a get rich quick scheme. Forex trading is a legitimate way of making money, however, it is not an easy thing to master.

With this article, and others to follow, we hope to provide clear, unbiased information on what forex trading is all about, and how to successfully trade forex so as to make money. This article is written by someone with over 8 years experience in this business.

What is Forex Trading?

Forex Trading is the marketing name for the online trading of Foreign Exchange; which is essentially betting on one currency to gain or lose against another currency. Some of the popular currency pairs are Eur/Usd, Gbp/Usd, Eur/Cad, and Usd/Cad. Therefore, when you buy Eur/Usd you are betting that the Euro will rise against the United States Dollar; when you sell the Gbp/Usd you are betting that the Great British Pound will lose value against the United States Dollar. Same principle applies to other currency pairs.

How to Trade Forex With Support and Resistance

There are many different ways or strategies through which one can trade forex. Before even attempting to make a single cent from forex trading it is important to first learn as much as you can; make sure you understand what ‘lot sizes’ mean, what margin calls mean, and what spreads are all about.

Because forex trading is all about the movement of prices, what you need to do is ensure that you know how to read the charts so as to know in which direction price is about to go. Let us now look at some of the most common trading strategies.

Support and Resistance

The concept of support and resistance is all about a floor (support) and a ceiling (resistance) between which price is expect to bounce. In order to make money from this system therefore, one would need to buy when price reaches the floor, and then sell at the ceiling.

Precaution requires you to put your stop loss below the support when buying so that if the trade goes against you by breaking below the support, your losses will be minimal. The same precautionary principle applies to selling at resistance; you may place your stop-loss above the resistance so that if the price breaks above the ceiling, your losses will likewise be minimal.

Risk To Reward Ratios

Taking profit while trading forex with the support and resistance system will require you to cut your losses early, and then let the winning trades run for as long as possible. When you are about to take a trade, you should look out for risk to reward ratios that guarantee profits. That means you must ensure that the potential profits will outweigh the potential loses.

A risk to reward ratio of 1:3 means that you hope to profit 3 times what you are risking. For example; you could be risking $100 while attempting to gain $300. Please note that 1:3 is just an example; there are several figures that you could possibly substitute with this. You can trade forex with a risk to reward ratio of 1:5, 1:10, 1:15, and so on. It is always better to be flexible when setting your risk (stop-loss) and reward (take profit).

Pros

With the support and resistance system you can determine how much you want to risk, and how much you expect to gain as the reward.

With this method you can easy plan your trades ahead, you already know what you are going to do next, whether the trade is successful or not.

With this system you can stay on one single currency pair; trading it successfully again and again.

Cons

It is important to keep in mind that some people have given the opinion that risk to reward ratios can be deceptive: sometimes they represent impossible odds: while a trade setup may look inviting because the reward may be several times the risk, the chances of said trade being successful maybe next to nothing.   That means the traders would be taking ‘good trades,’ but only incurring losses.

Conclusion:

Losses are an intricate part of trading forex; you cannot trade forex without making loses. Unfortunately, many people panic after making loses, and then they make trading decisions with their hearts rather than their brains. This can have only one result: further loses. Many new traders have plenty of information about how to spot potential trading opportunities, but they are unprepared for the emotional part of trading; therefore, as soon as they start making a few loses, they quickly lose all their money.

We have only discussed the Support and Resistance system in this article because we prefer to make it brief and easy to digest. The next article in this series discusses another system of trading forex.