How To Carve Out Support and Resistance Levels On Price Action Charts Before Trading On The Forex Market

Hello and welcome to another edition of the bulls and the bears. A long while back we learnt How to Identify Support and Resistance Levels. What we failed to learn was how to draw support and resistance levels on the price action charts before trading on the forex market.  Basically we are going to learn how to carve out support and resistance levels on the price action charts before trading on the market. This is something you should do at least the day before you trade on the forex market

.You want to identify potential trading zones among these key levels before placing your trades Before we start today’s lesson let  me sound a cautionary note to you all . Drawing support and resistance levels is not magic. It’s not a situation where price automatically hits a support or resistance level and then breaks out. Sometimes the levels that you draw may turn out to be the wrong ones as you trade live. The actual levels may be above or below the levels that you drew. And  that could cost you dearly in your trading account.

You may struggle with drawing these levels at the beginning but once you get the hang of it, drawing these levels will be second nature for you. So basically we are going to learn how to draw support and resistance levels properly before you trade. This is the surest way of avoiding tsunami -sized craters in your account.

First:

Look For the Next Significant Support and Resistance Levels

Your first task at hand is to look for the next significant support and resistance levels.  Let me sound another  cautionary note. Just because you are drawing support and resistance levels does not mean you draw all support and resistance levels that you set you eyes on. That  will cause you to pull your hair out. Even worse, you may miss out on some hot trades. Just draw a few lines  that clarify things as to what’s happening on the charts.

How Do We Do This?

Just draw one support level below the current price and one resistance level above the current price. Don’t worry too much about pinpoint accuracy. Just draw it at a place that makes sense to you. We’ll deal with accuracy later, Let’s look at an example using the EUR/USD pair S/R example 1 Ladies and gentlemen, here is an illustration of drawing a key support line and a key resistance line. Now the shaded price at the key support line represents the current price and the shaded price at the resistance level represents the current price at that level, Like I said don’t worry about accuracy. Just make sure it the logic behind your selection makes sense. I can hear you asking”Now How Do I Know It’s A Major Level?”

Check If There Is Enough Price Rotation Around That Level

Yes you need to examine whether there is enough price rotation around that key level. The best way to find out is to check how many times price has touched that level. You may have to tweak your key level slightly to accommodate as many  hit as possible from price both above and below the line. Now let’s take a look at the above graphic again S/R example 1 As you can see both lines are nicely drawn. Price  attacked these two lines several times and they rarely flinched. This means both lines are significant levels and they have serious backbone. Now price might hit your lines more than you are willing to accommodate. Occasionally price might break out just to take care of pending market orders.

However,  There is one breakout formation you need to keep an eye on. And the name is of this formation is simply called :

The Elbow

I can  hear someone  asking”Does it look like the human elbow?” Sorry! You got it wrong. Basically it’s a rotation point where a key level resists price’s onslaught such that price falls on its back. Now it will be ill-advised to trade elbows by themselves. But if  your drawn lines fall on these elbows, that’s your green light to put in your market order. Now let’s take a look at what the elbow looks like Elbow formations Here the elbows are shaded green. And they are located in two places. The first is in an uptrend and the second is in a range. And like I said, earlier they also act as support and resistance levels- assuming your lines falls on these levels. Let’s take a look at another elbow Elbow formations Here keep an eye on the full body and long skinny wicks  of the candlesticks. The lines seem to be  cutting through more wicks than full bodies. But I suggest you give more weight to the bodies than the wicks for purposes of peace of mind later on.  If you want to brush up on your candlesticks look up Fundamentals of Reading Candlestick Patterns. Next up is:

Examine Previous Price Action

You absolutely need to examine previous price action to see whether  those key levels make sense. Now when we say previous price action we are referring to historical price action in the past. Now I’m not saying scroll all the way back to price action of twenty years ago to do your analysis(That’ll take you the rest of your life). Just go back to price action  ranging from a week to a month previously. The price action data should be fresh enough for you decide whether the current key levels still  make sense. Let’s take another  look at the price action of the EUR/USD pair Historical data The data for from August to September seems pretty solid, Consequently it means the support and resistance lines pass the test. It also give you confidence to know that you’ve the right support/resistance lines at the right places. However, price  changes with time. Consequently your  historical data may be out of sync with your support and resistance levels. But with practice and a little practice you should be able to recognize the key levels like the back of your hand.

Use The Same Process To Find  the Next Set of Support and Resistance Levels

Now we’re going to use the same process  to find the next of support and resistance levels. They will definitely come in handy when you are looking for solid profit targets or stop loss levels. Now let’s look at the new levels in the EUR/USD  graphic. Second set of S/R levels This is what the next support/resistance levels look like. However, the next major levels are fairly close. There is not  room for maneuver. So you may have to sit tight and  wait for price to react on the outer lines rather than the inner lines before you put in your trade entry.

That’s a wrap for “How To Carve Out Support and Resistance Levels On Price Action Charts Before Trading On The Forex Market.” I assume everybody has gotten the hang of drawing support and resistance levels. The only way to perfect this is in live trading conditions. Practice till it becomes second nature to you . Then you can predict where price will hit at that level. Support and resistance levels can be  reliable places to enter trades and set awesome trade profits.

So long as you draw the key levels properly, you’ll accrue huge profits beyond your wildest dreams However drawing key levels is not an exact science. What you need to look for is your trading edge. Support and resistance levels help you give you that edge. If you want to watch price action run at the speed of light look up  Identifying Dynamic Support and Resistance Levels. Til next time  take care.

Opening Of Live  Forex Trading Account

If you’re looking to open a live trading account sign up with EasyMarkets.

Advertisements

Do Not Exit Your Trades Too Early

Hello and welcome to another edition of the bulls vs the bears. Today I have a little piece of advise for you:”Don’t Be Too Quick To Hit The Exit Button On Your Forex Trades” Why?because exiting early could cost you a hefty pay day. So many traders exit the market for mere breadcrumbs only to watch with horror as their trades become huge bumper harvests. To be brutally honest I’ve fallen victim to this trap a few times. Why do people fall for this trap?  It’s usually out of fear They are scared  the market will do a sudden 360 and put a tsunami-sized hit on their trading position. So they settle for breadcrumb profits or small loss.

Later, they start pulling their hair in disgust as they watch profits slip through their fingers. It’s like leaving  too much money on the table.When you don’t trust your trading plan well enough, you hit the panic button every chance you get. Unfortunately we all know that hitting the panic button throws all logical thought out the window.

So we are going to look why panicky traders head for the exits  too soon. And of course we’ll look at how avoid  heading for the exits and allowing your trade room to work.

First off,  what causes traders to head for the exits too early?

Poor Trading Process and Poor Understanding of Forex Market

Some traders head for the exits too soon because of a poor trading process and poor understanding of the forex market. They are basically saying “We don’t know what the heck we’re doing.” They trade without much of a trading plan with regards to entries, exits and  what to do after they enter a trade. Even worse, they’re so attached to their trades that they do the watchman routine by staring at their laptop screens all day hunting  for trades. How about applying the set and forget strategy and get on with life?

Even worse, they risk too much money on the trade. And when you do that,  you tend to hit the panic button even quicker than Speedy Gonzalez. In so doing,you over-leverage on your trading account which makes you more nervous and jumpy every time your trading position goes positive or negative. Whenever  the forex market makes  a move you’re like “This is it for me.” Or you feel  every little profit you make you have to take the money and run before the market turns around and devours your cash. You’ve made the forex market to be this two-headed monster;which shouldn’t be the case at all.

Previous Trading Losses

Yep, previous trading losses  can impact your decision to exit your trades too early. Not only that, they reinforce  an unhealthy sense of fear you may have cultivated about the forex markets.(Remember the two headed monster?) So  two quick losses may lead you to think “Hmmm….I think I may have bitten more than I can chew with this forex trading adventure.” All of sudden you start losing faith in your trading edge. This is suicidal because your trading edge is the eyes and ears  for your trades. It tells you whether conditions are right for you to enter your trades.

It’s also important that you realize that your trading edge  covers a sample of trades. In other words, you have to give the trades room to operate until they run out of steam.  So letting your last trade loss affect your feelings about the forex market has no rhyme nor reason.

Terrible Trading Mindset

A terrible trading mindset will most certainly influence your habit of exiting your  trades too soon. A lot of traders come  into the trading game thinking “I’m going to  make a lot of money quick, And I’m going to quit my job in a few months.” Well news flash! Forex trading is not a get rich quick scheme. But if you want to be rich from forex trading, then you will need to change your mental approach towards forex trading.

Some of you are probably thinking ” How in the world do I do that?”  Well, psychologists say behavior  stems from mindset.Your mindset kickstarts your bad habits,and those habits you exhibit on the forex market could be the difference between prosperity and poverty. You also need to understand that forex trading is a marathon, not a sprint.You have to treat it like any other business.By that you have to start slowly and grow your  trading account. And you have to show consistency in your trades.

The whole idea is to be steady and solid in your trading performance. Once you accomplish that, then your mindset changes from positive to negative . Not to mention the fact that  your profits will start rolling and  you can laugh all the way to the bank.

Harboring Negative Thoughts

Harboring negative thoughts can also cause you to lose big on your trades. Those negative  thoughts can eat you up big time  especially when you lose two to three   trades in a row. Of course when you start losing trades, negative emotions start kicking in.Once the negative emotions kick in, then bad trading habits follow. And when the bad trading habits become permanent, you incur more trading losses.

Even, worse,those trading losses also cause you to exit your trades at the speed of light. Then all of a sudden you’re thinking like”There is no way I can make money trading forex.I t’s just not possible.” Well,  if you are think thinking this way, you can forget about turning your trades into mega profits. Because it’s just not going to happen with you thinking this way. Often times these negative thoughts are buried in your sub-conscious and they get in the way of you making substantial profits.

Just allow your trades room to breath,and you will be laughing all the way to the bank. Now that we’ve established  the causes of exit trades too soon, I guess our next question is

How Do We Prevent Exiting Trades Too Early?

First thing you need to is:

Create a Trading Plan

You absolutely have to create a trading plan if you want to avoid exiting your trades too soon. Your trading plan is your war plan. You lay out your exit strategy and then stick to it regardless of  how hard the demons in your head  try to get you to do otherwise. You could also apply the set and forget strategy. Instead of siting in front of your screen all day hunting for trades,you set your trades and  go and chill outside. The market does the heavy lifting for you. You don’t need to be in front of the screen all day staring at your trades.

Once you hit your profit target, the money is credited into your account. Everything is programmed for your profit success. Just go to the beach while your trades rack in the profits.

Avoid Common Early Trade Exit Situations 

here are certain trade exit situations you absolutely have to avoid.  So what we’re going to do is to look at specific  situations that may affect you the trader with respect to exiting the trades. These solutions are not exactly etched in stone. Bu they should go a long way to keep you on the straight and narrow.

Situation 1 You exit a trade because you are  scared the market will turn around and drop a tsunami-sized  ton on you.

What’s The Way Out?

You need first to get one thing straight about the forex trade.You are going to lose trades. You just need to decide on how much money you can afford to part company with. However don’t make it a habit of losing too many trades or your trading account will be in a world of hurt. Probably the important thing you need to understand about trading is that you can’t be in a constant state of fear. Fear causes people to do illogical things including exiting trades a the speed of light.If that’s your trading line of thought, you could end up losing out on huge profits.

I can hear some saying”So how do I protect my losing trade?”well  you place a wide stop loss. In so doing you give your trade oxygen to breathe. I can hear another person saying  How do I set up the wide stop loss?”Well first decide how much money you can afford to lose. Next you tweak your position size to protect your initial risk. This way when the trade goes against you (And we hope it doesn’t happen), you can then say”I’m fine with my loss. Next trade please!”

You can also exit at  breakeven to avoid a loss. But in  exiting so soon you risk leaving a  lot of money on the table. Which is why you need to leave your trade and your screen alone and let the market  do its work. forex trading comes with a risk. You just have to manage your risk properly.

Situation 2

You exit a trade for breadcrumbs well before your initial profit target hits.

What’s The Way Out?

Get this straight.You cannot get by on breadcrumbs.You have to hit huge home runs (profits)  if you want to be a successful trader- just because you see a 1 hr pin bar against  your trading position. You have to say to yourself”May I not fall into quick exit temptation for breadcrumbs.” If it’s a 4hr trading frame  you’re working with you should not be looking at a 1 hr trading frame. Keep your focus on.  Stand by  your trading plan religiously and  do not panic! When you panic you don’t give your trades room to grow. Just be patient and the huge profits will come rolling in.

For information on trading time frames look up Multiple Time Frame Analysis

I’m not saying breadcrumbs don’t always makes sense. There make come a time when breadcrumbs may be all you have, depending on the trade setup. But if you adopt breadcrumbs as your trading template, you end up dying a slow painful death.

Situation 3

Exiting  a trade for a partial loss without any reason at all.

What’s The Way Out?

You know you may say to yourself” Let me take a small loss now so I don’t suffer  a tsunami-sized loss later.” But what you don’t realize is that you are slowly   killing  your trading account by taking multiple small losses. The losses may look small,but they all add up later. You need to allow the market to show you through your initial stop loss whether your stop loss placement was wrong or right. Why? Because the market is very unpredictable.And the only thing you have going for you is your trading edge which is a reflection of your initial trade.

What the stop loss does is  prove that your initial trade was wrong.  What am I trying to say here? Don’t let your emotions  force you to head for the exit. Just stick to your trading plan.

Situation 4

You can’t add to winning positions fearing the market will do a 360 on you

Solution

Just take advantage of strong trends that just keep going and going with no pullbacks at all. That’s the best way to create wealth as a trader. I know you’re probably thinking”This  is too good to be true.” Well, these trends do happen. You just need to take full advantage of these phenomena,grow  your trading  account and give your head a break. Don’t overthink the process. and don’t be scared either. These two negatives could cause you to miss out on huge money-making moves on the charts

That’s a wrap for ”Do Not Exit Your Trades Too Early.”  It’s very important that you know how to properly exit trades and also how to manage these trades. Even more important let the market do the talking for you rather over-analyzing trades and spraying your ego all over the place.

And please don’t even think about telling the market what to do. The forex market has a mind of its own and can pretty much decide to throw your trade into the Atlantic Ocean if it feels like doing so.

If you want to prosper as a forex trader, let go and let the forex market. The best way to employ this strategy is get out of the way and let your trading edge do the talking. Just set, forget and end enjoy life. This way you trade according to the dictates of the forex market instead of you trying to control the market.

Til next time take care.

 

Opening Of Live  Forex Trading Account

If you’re looking to open a live trading account sign up with EasyMarkets.