Welcome to our guide on how to trade support and resistance on a stable currency pair. With this, you will learn how to find the trendlines and place a market order based on information that will guarantee you returns. We will also cover things limit orders, stop limit order, stop loss order, and other details that we think you should know about. We also feel for your demo needs; you should find the best forex broker in our forex broker reviews.
Often, you will find that it is advisable to trade using support and resistance when the currency pair is stable. If it is stable, it will have a clearly defined trendline that does not go above a certain level and does not dip below a certain level.
With that in mind, you will find that placing market orders based on the conclusions you get here will be more profitable when done right.
In forex trading, there are currency pairs that are volatile with unpredictable movements that can throw you off your game if you are not careful to keep an eye on them. Struggling to catch these wild swings can sometimes prove to be very hard.
In the examples we are going to give you here, we will use one of the most stable pairs in the market; the AUD/NZD pair.
The Australian dollar and the New Zealand dollar will be the prime example of ensuring you understand every aspect of trading support and resistance and making accurate market orders.
It is known by most of the traders in the market that any currency pair containing the US dollar, is usually not stable. There are just too many factors that impact the fluctuations that the currency undergoes.
Why Should You Trade AUD/NZD As a Stable Pair?
Because of the vulnerability of the US dollar to news events like oil and many others, it is always advisable when you are a newbie to trade stable pairs. That is where we bring in the AUD/NZD pair. It is one of the most stable currency pairs, and here are the characteristics that provide a testament to that:
- The currency pair has clearly defined upward, sideways, and downward trendlines. This is a characteristic that makes it easy to trade support and resistance on the pair than on others, which tend to swing very wide.
- It is not easily affected by a lot of the market news that affects the other pairs. It is only affected by news that impacts Australia and New Zealand, and those countries are relatively on an even keel. Nothing controversial or impactful ever happens there. Even when things do happen, the swing is never that wide.
- The currency pair does not experience the choppy and erratic movements that the others have. With that, you can place the limit order, stop limit order, and stop loss orders, with relative ease, knowing with some degree of certainty that nothing out of the blue will happen.
Support and Resistance Trading, Trendline, Using The AUD/NZD Currency Pair
We think a direct approach will be best if you are to make market orders that turn out well to use this strategy. We would like to employ the old trendline strategy on a daily chart and use it to show the support and resistance areas with relative ease.
We will do two things here:
- We will trade a bounce off support and resistance.
- We will also trade a break of support and resistance.
With the daily chart, we have the advantages of seeing a trendline that is clearly defined. There is greater accuracy in using the daily charts. For a currency pair that does not get affected by the wild swings of everyday trade, it is an advantage to the new trader who wants to learn how to make limit orders, stop limit order, and stop loss orders.
How to Trade-Off the Trendline
To trade off the trendline, you need to buy off support or sell at resistance. The factor you need to watch out for here is whether the candle is breaking the trendline or not. If the prices are on a downtrend and the critical price bar or candle fails to close below the support trendline, you have no breakout and cannot buy off that support.
If the price candle/bar touches the resistance line in an uptrend but fails to close above the trendline, you can quickly sell off the resistance.
It is essential to keep this example in the context of a daily chart. The price may test the trendline several times in a single day. For that reason, you need to have some patience, enough to allow the price to test the trendlines before you make a market order to sell off the resistance or buy off the support.
Volume information is essential when it comes to making trades and placing your market order. Volume is more important than the uptrend and the downtrend. An increase in the volume could mean that there is an increased activity for my market participants.
So, when you spot an increase in selling volume after repeatedly seeing the resistance trendline tested, you should start thinking about selling.
In this example here, we see that the price was unable to go above and formed a resistance. Prices went down from there on, to an area where they could not go below. That area forms the support.
Then, they ascended to test the resistance trendline without breaking it. This is the opportunity you would have to sell. In this setup, a sell trade-off a resistance would utilize the previous support as the profit target, and set the stop-loss order above the resistance line.
How To Trade a Break of Support or Resistance
The other method you can use to place market orders using support and resistance is to trade the break-pullback-breakout event sequence. Typically, the price will attempt going back to where it was before the break of the trendline.
After it pulls back to that trendline that was just broken, the trendline changes function. Once the support area is broken, the price will try a pullback up, but the broken trendline will reject this attempt by becoming the resistance.
If resistance is broken and the price tries to pull back to the broken resistance, the trendline changes its function and becomes the new support, preventing the price from going on a downtrend.
We have discussed this in our other articles. It is called role reversal.
When you have that idea internalized, you can trade a price bounce at support, after a pullback with a buy limit order. Or, you can trade a price rejection at resistance after the pullback, using the sell limit order.
A limit order is what we use because it helps the trader to enter trades at prices that are better for more profits. So, when you see a pullback in progress, you can set your limit order in the direction of the trade by using the price level of the broken trendline, as your entry price.
Keep in mind that a candle lasts the whole day on the chart, so it is not practical or beneficial to sit on a computer for the entire day when you can use the limit order instead.
In this illustration, we saw the daily chart of the AUD/NZD pair for July to December in 2019, as you can tell from the support levels, the break of support, the pullback, and the role reversal. Downside moves like the ones shown here do not require you to have volume confirmation.
A sell limit order at the 1.0856 marks, would have given you a profit of 368 pips if the profit was taken at 1.0488.
Understanding the Two Simple Ideas Behind This Strategy: The Bounce and The Break
Let’s get into the details of what these two terms mean and break them down for further understanding:
- The Bounce
As the name tells us, this method of trading support and resistance levels is right after a bounce happens. Many retail traders make an error when they decide to set their market orders directly on the support and resistance levels and then to wait for the trade to come together.
This might work at times, but with that trading method, you are assuming that a support or resistance level, will hold even though that is not guaranteed. You might imagine the best possible place to set your market order is right on the line, but that is not right.
When you play the bounce, you are making sure that the odds are in your favor and as a confirmation of sorts that the support or resistance will hold.
Here is what that would look like when you have a line for the stop loss order
If you want to go short, you would be better off waiting for it to bounce off the resistance trendline before entering. That would look something like this:
When you do this, it insulates you against the moments when the price moves too fast and breaks through the support and resistance levels. Placing yourself on the lines themselves would be akin to trying to catch a falling double-edged knife with no handle. It will cut you.
- The Break
If the world were perfect, resistance and support levels would not break, we'd all be immortal cyborgs, and the aliens would visit. However, we do not live in a perfect world. The truth is that the levels break a lot.
It is not enough to play bounces. You should also be aware that the levels can give way and position yourself only when you feel there is little or no volatility to deal with. You can choose to be aggressive, or you can be conservative.
You have to make a choice based on how much experience you have accumulated over the time you have been using the demo and the time you have spent in the forex market.
There are two approaches you can consider when trading the support and resistance:
- The Aggressive Move
The simple method to play the breakouts is to buy or sell when the price convincingly passes the support or resistance zone. Keep in mind that the keyword here is convincing. Do not change it. We want to see the support or resistance area, broken. Like this:
Picture this: you go long on the EUR/USD pair and hope that it rises after bouncing off the support level. However, the support breaks, and you are holding a losing position as your balance gets chewed away.
Do you accept defeat, exit the position, and liquidate it?
Do you hold on to the trade and hope it rises again?
If you go for the second option, then conservatively, is how you will most likely trade. Instead of getting into the trade on the break, you wait for the price to make a pullback to the broken support and resistance and then enter after the price bounces.
That looks like this:
PRO TIP: These things do not happen all the time. Retests of the broken resistance and support levels do not happen all the time. There will be times when the price is on an even keel, staying in the same direction and leaves you behind. For that reason, always use the stop-loss order and never hold your position because of hope.
We want you to do this; trade the AUD/NZD in your demo. We have told you time and again, most of the things you need to know about market order, why the demos are essential, and even covered limit order, stop-limit order, and stop loss order.
With the demo, you will be able to acclimate to what a stable currency pair looks like. In that way, you will have no trouble learning how to trade off the trade by trading long off the support or trading short when the price breaks the support area.
After a while, you will know what it looks like, how they fluctuate, and where you need to be positioned to make money.