How do you know if a trade is a winner?… Well, you don’t.
In this episode of Truth About FX, Walter talks about support and resistance lines and how to tell if the market has reached the level. What signals should you use when turning that alarm on and when should you use them?
Download (Duration: 03:44 / 4.27 MB)
In This Episode:
00:28 – broken or not?
01:16 – break and go
02:12 – double top
03:17 – quick and dirty
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. How can someone determine if a support or resistance line has been broken or not?
Walter: Well, obviously, you don’t know for sure but these are the rules that I will use and I can post a video in the show notes. I’m actually doing the webinar tomorrow but I will record it and I’ll post it in the show notes for everyone listening to this episode.
So, look, that’s like saying, “How do you know if your trade is going be a winner?” The answer is we don’t know. But this is what I will look at. I will look at if the market reaches a support and resistance level.
Let’s say that the market is going up and it reaches resistance. If it’s going up and hits resistance and it stays there, in other words, each candle… Let’s say we’re looking at the daily charts. The daily candles keep pushing into that resistance level. The longer that happens, the more likely it is to break and go higher. The longer the market sits there and keeps pushing it, the more likely it’s going higher.
Now, contrast that with the market that’s going up. It’s going up, it hits that resistance level, it moves away from it immediately. And it comes back up and hits it again, and it moves away from it immediately. Well, now maybe we have a double top.
So if you — and the line chart is a clue here. Again, you’ll see this in the video that I’m posting in the show notes for this episode but I think the most important thing here is what are the rules? What is it look like when the market’s going to break through its own, in support resistance zone?
What I’ve found in my testing is that it usually hangs around on its own. It’s just that you know 7 of the last 9 candles, have the wick of the high has pushed into the resistance zone then it’s probably going to break it.
Whereas, let’s say only 4 candles out of the last 10 have touched that zone and maybe you’re looking at a double top. It’s hard to explain this here and I know the videos will make more sense when you see that in the show notes but, for right now, that’s just kind of my rule.
I don’t look at overbought or oversold or anything on the RSI or Stochastics or anything like that. What I’m just looking at is, I’m trying to answer this question: Has the market been repeatedly pushing into this zone with the recent candles? If the answer is “yes”, then I assume that we’re likely to see a breakout.
Now, the safe way to play the breakout of course is to wait for the market to break through that resistance levels. Spend some candles above it, and I mean close well above it and then pull back to the resistance zone and find support there. And then, print a bullish candle or a nice big fat bullish candle and then you can trade off for that. That’s obviously a breakout in a retouch.
It’s all in the hills in trading but that’s really the way that you know that’s the way that you can do it. If you just put a buy order on the other side of resistance, you could get wicked into it and then you end up with a loser.
If you wait for the breakout in a retouch, it’s just a safer way to trade. A quick and dirty answer is, we don’t know if it’s been broken or not but typically, the longer it sits there waiting, the more likely it is to break. That is what I’ve found anyway.
Hugh: Okay, cool. Thanks for that tip.
Walter: Thank you.