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Trading Rules for Support and Resistance

Just as there are  rules for trading Japanese candlesticks, there are also several rules you need to follow if you want to make wise trading decisions in the Forex market.

These rules are:

1. Draw your support and resistance lines.
2. Draw your trendlines. Remember: trade in the direction of the trend, because the trend is your friend. You want to be able to identify if the trend has been broken because you likely want to exit at that point.
3. Decide whether you will go long or short (based on overall trend direction).
4. Appropriately place your stop loss orders. For information on how to place stop loss orders when trading on support and resistance levels, see above. If the stop is too far away from your entry point the risk may be too great and you should consider passing on the trade.
5. Create a plan. Trade the plan. Traders get in big trouble when they become emotionally invested in a particular trade and so hang on too long to a losing trade. Even if you follow all of the trading rules and trade all of your indicators correctly, you will lose on some trades, just as any business takes losses as well as profits. By sticking to your trading plan you will maximize your profits and minimize your losses.

Past Resistance Levels can become Future Support Levels

As you read earlier, a bull wants to see the market achieve new highs, taking out previous levels of resistance and a bear wants to see the market taking out previous levels of support.

Sometimes past levels of resistance can turn into levels of support. This happens when the market has broken a the current level of resistance, but before it goes on to break the next level of resistance it bounces (bottoms) at the first level of resistance, which then becomes a level of support.

Eventually the market will break the support level (once a resistance level) instead of bouncing there, indicating a trend reversal. To trade in this situation, buy at the support levels and set your stop loss order at the last support.

Past Support Levels can become future Resistance Levels

Past levels of support can also turn into levels of resistance. This happens when the market has broken the current level of support, but before it goes on to break the next level of support it bounces (tops) at the first level of support, which then becomes a level of resistance.

Eventually the market will break the resistance level (once a support level) instead of bouncing there, indicating a trend reversal. To trade in this situation, sell at the resistance levels and set your stop loss order at the last resistance.

That concludes my basic overview of support and resistance for forex trading. This topic will come up when explaining future trades, so make sure you review the basics about support and resistance in the forex market until you fully understand them.

Posted in Technical Analysis

8 Rules For Successfully Trading Candlestick Formations

The last 4 blog posts have taught some of the major candle patterns worth knowing as a forex trader.  And with 8 posts in the past week about candlesticks, we’re almost ready to move on to support and resistance.

As a wrap up for now (there’s more to learn about japanese candlesticks later), I want to give you some rules for trading candlestick formations.

No matter what forex candlestick formation or other indicator you are basing your trade on, you should follow several rules to ensure that you are making sound judgments when you are trading, that you are trading based on educated reasons and always while practicing sound equity management.

These rules apply specifically if you are trading a morning star , evening star , tweezer top , or tweezer bottom candlestick pattern:

1. Find all of your support and resistance lines.
2. Find and draw all of your trendlines.
3. Find a convergence (a location where there is more than one reason for the market to bounce, such as a trendline or a Fibonacci sequence).
4. Trade in the direction of the trend (“the trend is your friend”).
5. Wait to trade until the market bounces at the convergence to make your trade.
6. Buy at the opening of the next candle after the morning star or tweezer bottom has fully formed. Sell at the opening of the next candle after the evening star or tweezer top has fully formed.
7. Set your protective stop loss order at the last level or resistance (if you are trading an evening star or a tweezer top) or at the last level of support (if you are trading a morning star or tweezer bottom).
8. Do not trade morning stars (evening stars) or tweezer tops (tweezer bottoms) if prices are in consolidation (the rapid forex blog will discuss this in more detail in future blog posts).

In my next blog post, I’m going to start explaining support and resistance (this is the real meat-and-potatoes of forex trading).

Posted in Japanese Candlesticks, Technical Analysis