Only one of two things can happen when a price approaches support or resistance: the price can break through it, or it can bounce off and reverse direction. The same is of course true for trend lines.
1. Trading on a Pullback
If a chart is trending in a clear direction, and a trend line can be drawn connecting a series of relative highs or relative lows, trading opportunities exist when the price approaches the trend line. If the price bounces off the trend line and resumes the trend in the original direction, this can be an excellent opportunity to enter the market in the direction of the dominant trend. This is often referred to as buying on a pullback in an up trend or selling into strength in a downtrend.
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Buying on a bounce off such a support line can be done through a limit order just above the support.
2. Trading a Break of the Trend
The second possible trade is the break of the trend line, which can be traded just as any other broken support or resistance line. If a candle closes through a trend line to the downside, as in the example below, the proper entry point would be to sell once the price moves below the low of the breakthrough candle.
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This ensures that the short term force is in the direction of the break lower. The opposite would be true for a break above a resistance line.
Price Channels
A trending market can move between parallel support and resistance levels. A price channel between two parallel lines can often be drawn in a trending market. The key to a price channel is that the lines be parallel to each other. The value of the price channel in predicting the ongoing speed of a trend depends on the lines being parallel.
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Unlike trend lines, which can be drawn on any chart with two relative lows or highs, price channels should not be forced on a chart where they are not quickly apparent. Once a trend line is established, create a duplicate parallel line on the chart. Then move it up to the relative highs above or down to the relative lows below the trend line. If two or more fit with the line, there may be a valid price channel. Otherwise, the market may simply be too volatile - even in the midst of a strong trend - to plot a channel.
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In the above example the (support) trend line itself is valid, but creating a parallel line on the opposite side of the prices does not add any value to the chart and is not warranted by the data. Placing a support or resistance line where it does not belong will simply provide you with false signals to buy or sell.
About The Author
Action Forex (http://www.actionforex.com) provides forex analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebooks downloads.
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One of the cardinal rules of Forex trading is to keep your losses small. With small Forex trading losses, you can outlast those times the market moves against you, and be well positioned for when the trend turns around. The proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position. The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade. With your maximum loss set as a small percentage of your Forex trading float, a string of losses won`t stop you from trading. Unlike the 95% of Forex traders out there who lose money because they haven`t applied good money management rules to their Forex trading system, you will be far down the road to success with this money management rule.
What happens if you don`t set a maximum loss? Let`s look at an example. If I had a Forex trading float of $1000, and I began trading with $100 a trade, it would be reasonable to experience three losses in a row. This would reduce my Forex trading capital to $700. What do you think those 95% of traders say at this time? They would reason, “Well, I`ve already had three losses in a row. So I`m really due for a win now.”
They would decide they`re going to bet $300 on the next trade because they think they have a higher chance of winning.
If that trader did bet $300 dollars on the next trade because they thought they were going to win, their capital could be reduced to $400 dollars. Their chances of making money now are very slim. They would need to make 150% on their next trade just to break even. If they had set their maximum loss, and stuck to that decision, they would not be in this position.
Here`s a perfect illustration why most people lose money in the Forex trading market. Let`s start out with another $1,000 float, and begin our Forex trading with $250. After only three losses in a row, we`ve lost $750, and our capital has been reduced to $250. Effectively, we must make 300% return on the next trade and that will allow us to break even.
In both of these cases, the reason for failure was because the trader risked too much, and didn`t apply good money management. Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits. With your money management rules in place, in your Forex trading system, you will always be able to do this.
About The Author
David Jenyns is recognized as the leading expert when it comes to designing profitable stock trading systems.
Discover the "secret formula" of trading that anyone can use to consistently generate BIG profits from the market by downloading your FREE copy of David's new Ultimate Stock Trading Systems course.
Click Here To Download ==> Stock Trading Systems
http://www.ultimate-trading-systems.com/stocks.htm
What happens if you don`t set a maximum loss? Let`s look at an example. If I had a Forex trading float of $1000, and I began trading with $100 a trade, it would be reasonable to experience three losses in a row. This would reduce my Forex trading capital to $700. What do you think those 95% of traders say at this time? They would reason, “Well, I`ve already had three losses in a row. So I`m really due for a win now.”
They would decide they`re going to bet $300 on the next trade because they think they have a higher chance of winning.
If that trader did bet $300 dollars on the next trade because they thought they were going to win, their capital could be reduced to $400 dollars. Their chances of making money now are very slim. They would need to make 150% on their next trade just to break even. If they had set their maximum loss, and stuck to that decision, they would not be in this position.
Here`s a perfect illustration why most people lose money in the Forex trading market. Let`s start out with another $1,000 float, and begin our Forex trading with $250. After only three losses in a row, we`ve lost $750, and our capital has been reduced to $250. Effectively, we must make 300% return on the next trade and that will allow us to break even.
In both of these cases, the reason for failure was because the trader risked too much, and didn`t apply good money management. Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits. With your money management rules in place, in your Forex trading system, you will always be able to do this.
About The Author
David Jenyns is recognized as the leading expert when it comes to designing profitable stock trading systems.
Discover the "secret formula" of trading that anyone can use to consistently generate BIG profits from the market by downloading your FREE copy of David's new Ultimate Stock Trading Systems course.
Click Here To Download ==> Stock Trading Systems
http://www.ultimate-trading-systems.com/stocks.htm
