Forex technical analysis: using trend lines for trading methods and precautions
Some foreign exchange trading retail investors often make such mistakes, they directly place orders at the support or resistance level, and wait for their transactions to become a reality. Of course, this approach sometimes works, but the premise of this trading method is to assume that the price will remain stable at the support or resistance level, and will not wear or break below the above levels.
You may be thinking, “Why can’t I just place a limit order on the trend line? I can guarantee that this is the best price.”
When we seize the opportunity of a rebound to trade, we will find some information that can confirm that the support or resistance level will be stable. Before we enter, we will wait for the price to experience the first rally, rather than simply buying or selling on the trend line.
The advantage of this is that it can avoid sudden and rapid price fluctuations and break through support or resistance levels. Experience tells us: “Using an empty hand to catch a fast-falling knife may be bloody.”
Under ideal conditions, the support and resistance levels will remain stable forever. In the perfect trading world, whenever the exchange rate touches the main support or resistance level, we just happen to be able to enter or exit the market, and thus achieve huge gains. However, the fact is that these support or resistance levels are usually broken.
Therefore, it is not enough to use the price rebound for trading. You should also know what measures should be taken when the support and resistance levels are broken, no matter when.
When the support or resistance level is broken, there are two trading methods: the aggressive trading method and the conservative trading method.
The easiest way to trade when a breakout occurs is to sell or buy when the price effectively breaks through the support or resistance area. Pay attention to the keyword “valid” because only when the price completely breaks through the support or resistance level can we have a good reason to buy or sell.
When the exchange rate breaks through the support or resistance level, the effect we want to see is that the martial arts master splits the brick with one hand.
Conservative Trading Act
Let’s assume such a scenario: you expect the euro / dollar to rebound after testing a certain support level, so you plan to go long on the euro / dollar. However, shortly after, the exchange rate fell below the support line and your account began to lose money.
At this time, you are …
- Accept reality and close out?
- Continue to hold and wait for the exchange rate to rise again?
If your choice is the second, then you will easily understand the essence of the conservative trading law.
Remember, no matter when you choose to close the position, your trading direction at this time is the opposite of your previous direction. For example, if you close the euro / dollar long position in a break-even state, this means that you also short the euro / dollar with the same fund size.
Now, if there is enough selling near the broken support line, the price trend will reverse and start to fall again. This phenomenon is also the main reason why the support level becomes resistance after being broken.
Of course, using this phenomenon to conduct transactions requires sufficient patience. You need to wait until the price retraces to the already broken support line and rebounds, instead of entering immediately after the breakthrough.
Traders need to pay attention to:
This is not always the case. The “backtest” of a broken support or resistance level does not always happen. Sometimes, the price will only move in one direction and leave you behind. In view of this, we always need to set a stop loss and never carry it with a ray of hope.