Intro to My Forex Support and Resistance Trading Strategy
For quite some time now, I've been sharing daily forex market analysis right here on my LeoFinance blog.
But unfortunately, my engagement has remained low.
This is because while I call my forex support and resistance strategy simple, some of the jargon can certainly seem overwhelming to a newcomer.
To overcome this, I'm going to share my simple forex support and resistance strategy in its entirety, right here on LeoFinance.
My strategy needs a base and what better place for it than right here on the blog.
Forex Support and Resistance
What is Forex Support and Resistance?
Kicking off my trading course, we're going to start by going over what is support and resistance.
We'll then discuss how to identify key levels. Both required skills before we can talk about actually trading around them.
What is support and resistance?
Support/resistance zones are areas of price that are used to show where buyers and sellers have been in the past.
They're often characterised by past bottoms (support) and tops (resistance), but put simply, support/resistance is a price we've seen a reaction from in the past.
They say a picture can tell a thousand words, well take a look at the following:
As you can see from the above example, support is nothing more than a bottom in the market and resistance a top.
These bottoms and tops could be short or long term. The only thing that matters is that price has bounced off the zone sometime in the past.
Because humans are creatures of habit, when price returns to a support or resistance zone, you're likely to see a reaction.
Forex support and resistance zones certainly aren't a guarantee that price will act as an impenetrable brick wall.
But they are areas where you're likely to see a reaction and therefore they help put the odds that little bit further in our favour.
How to Place Forex Support and Resistance Zones
Now we know what forex support and resistance zones are, it's time to talk about how to place them on our charts.
One mistake that many new forex traders make, is thinking of support and resistance in terms of a very specific price.
They see support and resistance drawn as hard horizontal lines and try to deal in exacts.
But support and resistance is much more of an art than a science and as a result, should be thought of in terms of zones.
Take a look at the example EUR/USD daily chart below.
Steps to place forex support and resistance zones
- Start on a higher time frame chart such as a daily.
- Place horizontal lines at swing highs and lows.
- Add transparent rectangles down to candle bodies, turning levels into zones.
Remember, support/resistance is merely a guide that takes advantage of human nature, not a hard top or bottom of the market that can’t ever be broken.
Draw your forex support and resistance zones like this and then watch how the market reacts to them the next time that price returns.
Where to Look for Forex Support and Resistance Zones?
Something you may have noticed so far is that I've only shared daily charts.
This is not a coincidence.
When placing your forex support and resistance zones, always start on a higher time frame chart such as a daily.
As for where to place them, there are 2 significant places that you need to pay attention to when you're looking to draw your support and resistance zones on the daily chart.
Swing highs and lows
These are areas on the chart simply where price has rejected and majorly ‘swung direction’ off of.
These swing high/lows are the types of forex support and resistance zones that you're going to be finding and placing on your charts the most.
Psychological levels
These are simply round numbers that look like they’d be a big deal to a human.
For example, when price was approaching $1.00000 on AUD/USD, there were literally headlines saying ‘PARITY PARTY!’
Humans are dumbarses and like shiny round numbers, so traders place orders around them.
Orders that banks and institutional traders like to take advantage of when price returns to these zones, so they're worth watching on our charts.
4 Forex Support and Resistance Tips and Tricks
Here are a list of 4 tips, tricks and final thoughts around placing forex support and resistance zones.
Forex support and resistance zones aren't brick walls: Don't fall into the trap of thinking that a support/resistance zone on your chart is an impenetrable barrier that price can't ever break. They're merely a guide where you think other traders are going to be doing business.
Forex support and resistance zones are interchangeable: That is, once broken, support will often then act as resistance and vice versa. This is why I usually always refer to support and resistance zones using both words together.
The more touches a forex support and resistance zone receives, the more significant it will be: Notice that I didn't say that more touches on a zone makes it stronger? Touches add significance because more and more people start watching and building orders around the zone.
When price pokes through a forex support and resistance zone before reversing, stops are being hunted: No, this is not your retail forex broker trying to specifically screw you over. This is smart money from banks and institutions taking advantage of stop orders that are clustered just beyond obvious support and resistance zones. By waiting for these clusters to be cleared, you can ride on the coattails of the big boys.
Forex Price Action
What is Forex Price Action?
After going over what is forex support and resistance, it's time to move onto price action.
Price action is how price moves around levels of support and resistance. It's displayed visually by the candles on your chart, with different candle patterns showing us who's in control between buyers and sellers at any given time.
As I’ve said previously, the closest you’ll get to predicting the future, is in the here and now of price. All technical analysis indicators derive their formulas from price, so why not just go to the source and use price itself to trade?
To read price action, we use Japanese candlestick charts as a visual representation of price.
What is a Forex Japanese Candlestick?
Each candle display price action within a specific timeframe.
For example on a daily chart, each individual candle displays an entire day's worth of price action.
But when it comes to explaining what is a forex Japanese candlestick, let’s just say that a picture is worth a thousand words:
As you can see in the diagram above, each candle has an open, close, a high and a low. Between which, you have a body and two wicks.
As an example, let’s say you’re watching the EUR/USD daily chart. This means that each candle represents 1 day's worth of price action.
If the candle opens at 1.2000 and moves up by 100 pips to close at 1.2100, the candle’s body will be bullish (green) and exactly 100 pips high.
But lets say that within that same 1 hour of price action, price traded as low as 1.1975 and as high as 1.2025. The candle would then have two wicks above and below the candle body’s open and close, reaching the high and low point of that hour’s price action.
For the candle’s body to be bearish (red), simply reverse the open and low so that the candle opened higher than when it closed.
Always keep in mind that candle patterns are useless on their own. For them to mean something, you must always consider the market environment and levels that they have formed around.
The Most Important Forex Candles - Indecision Candles and Dojis
Now we've gone over what is forex price action and learned the basics of Japanese candlesticks, lets move forward to the most important forex candles.
There are literally hundreds of forex candles out there for you to discover. But like many things in trading, when it really comes down to using them on a live forex chart, they don’t really form like the textbook tells you they do.
The most important candle patterns to look out for, are indecision candles. This means look for candles that show areas where the bulls and bears are currently in a battle for control.
This battle is best highlighted on a price chart, by long wicks and a small candle body.
Dojis
Forex candles that match this description in some way are known as dojis.
Textbook dojis have the same open and close price, but for us all that matters is that their bodies are extremely small. A doji should have a very small body that looks something like a thin line.
Dojis suggest there is a struggle for control between the bulls and the bears, resulting in this key indecision forex candle forming.
Price moves above and below the open price during the candle’s time period, but closes back at, or at least very near, the price it opened.
Neither buyers or sellers were able to gain control and the result is indecision.
Key Doji Candles
- Dragonfly doji
- Gravestone doji
According to the trading textbooks, if the above two dojis have the slightest of candle bodies, then they are renamed the following:
- Hammer or hanging man
- Inverted hammer or shooting star
But seriously... who gives a fuck?
They mean the exact same thing, so they are the exact same thing.
You’re never going to get that clean, textbook candle, so stop worrying about it. If they look the same, then they are the same.
What Turns Forex Indecision Candles Into Reversal Candles?
But forex indecision candles such as dojis are relatively useless on their own. All they show is indecision in the market between buyers and sellers.
To turn an indecision candle into a reversal candle, we need to consider the preceding price action. Only then does the chart start to hint at what may happen to price in the future.
Take a look at the following examples:
If a doji forms within a downtrend, or in other words, after a series of strong bearish candles, the doji is signalling that the sellers are becoming exhausted and a reversal may be on the cards.
This is the earliest sign of the preceding bearish trend coming to an end as you are watching the sellers lose control before your eyes.
The same is also true if a doji forms within a bullish trend. Once again, that is after a series of strong bullish candles, the doji is signalling that the buyers are becoming exhausted and a reversal to the downside, may now be on the cards.
4 Forex Price Action Tips and Tricks
Here is a list of the 4 tips, tricks and final thoughts to consider when trading forex price action.
Candle wicks: Pay close attention to how they form, in order to get an idea of whether there is indecision in the market. The longer and more pronounced the wick of a candle, the bigger the rejection was.
Candle bodies: Don't get caught up on whether a doji has a candle body of just a few pips. As long as it's a tiny body, the price action is telling you that the buyers and sellers were equally in control as the candle closed.
The preceding trend: Try to identify whether the market you’re analysing is in a bullish or bearish trend. This will give you a hint as to whether a doji is indicating that buyers/sellers are losing control and a possible reversal may be on the cards.
Whether they form on a support/resistance zone: Another weapon to add to your trading arsenal is the location of the doji. If a doji forms after a long bullish trend, right on top of a resistance zone, then that's another strong signal that buyers are losing control.
Trading Forex Support and Resistance with Price Action
Long or Short: Using Higher Time Frame Support and Resistance to Decide Direction
So here we are at the most important part of this free forex trading course. The part where we put everything we’ve learned about support/resistance zones and candle patterns together to make some money.
In this section, you'll learn how to enter the market using my simple forex support and resistance trading strategy.
Higher time frame is king
While the higher time frame charts may be slow, they are the most significant. There is no taking shortcuts to speed up the process. We take what the markets offer.
As a result, your first step to trading these types of setups is to always start on the daily chart and identify higher time frame forex support and resistance zones that are in play.
By in in-play, all I mean is that price is currently close to them and the zone may be soon touched.
Long or Short?
If price is above higher time frame support then you should be looking to buy (trade long).
If price is below higher time frame resistance, then you should be looking to sell (trade short).
Simple enough, right?
Now let's take a look at a real world example from a USD/JPY long trade we took on this LeoFinance blog a few weeks ago.
Here's the USD/JPY daily chart as price pushed down toward higher time frame support:
You can see that this higher time frame support zone is significant because price has pinged higher off it twice in the past.
Because we're above higher time frame support here, the next time that price approaches it, we want to only be thinking about buying.
By taking this approach, we ensure we remain on the same side of the market that the big flows are on.
Remember, higher time frame is king!
While we could just blindly buy the market now, we're going to use the intraday charts and price action techniques we've learned in this course to refine our entry.
Trade entries: Using Intraday Forex Support and Resistance to Maximise Risk:Reward
In order to find entries, I finally zoom into an intraday chart and use short term support/resistance.
I do this to make sure all time frames are lined up and telling us to trade in the one direction. It also allows us to get the best risk:reward possible.
Example Long Entry on USD/JPY
Remember the higher time frame analysis we already did on USD/JPY? As price was above higher time frame support, we were looking only to long.
Now take a look at the intraday price action when price came back to retest daily support, on the hourly:
How to Enter a Long Forex Trade Using my Simple Forex Support and Resistance Trading Strategy
- Wait for price to retest and then hold daily support.
- Find the first area of short term resistance (a red hourly candle above the daily zone) and draw a short term zone.
- When price retests the short term zone, go long.
- Place your stop below the intraday zone if you're aggressive or below the daily zone if you're conservative and target 1:3 risk:reward.
Do the opposite for a short entry if the daily chart is below resistance.
You can also see on the USD/JPY example above, that price gave you a second chance to double down and compound your profits.
3 Final Forex Support and Resistance Trading Tips and Tricks
Here are 3 final tips and tricks for you to consider when trading this strategy.
Higher time frame is king: Always make sue that you’re trading with the heard by making sure that the market is above or below key higher time frame support/resistance zones.
Use short term support/resistance to find entries on intraday pullbacks: This is key to getting good entries, with tight stops and for your sanity, will help you not buy the top or sell the bottom if you’re wrong.
Focus on money management: Your money management and the risk:reward ratios that you can get out of these setups, become the key to making real money on winners, while keeping your losses consistently small.
As I continue to provide market analysis right here on my LeoFinance blog, you'll now be able to return to this guide and fully understand the process behind my trading.
Hopefully this will allow you to trade some of the setups alongside me, confident you understand the strategy and make some money as a result!
If you have any questions or suggestions for what I should add or discuss within this guide, then leave a comment below or ping me on any of my socials.
Best of probabilities to you,
Dane.
FOREX BROKR | LeoFinance
Daily market analysis and education.