PROFIT FROM TRADING RANGES AND ZONES
Using trading ranges and zones helps us predict how a currency pair will behave, in order to profit from historical prices
Trading ranges and zones are one of the basic forms of technical analysis, which essentially involves locating areas of support and resistance and using them to identify targets or trade entries.
Trading within rangebound markets or sideways markets is more challenging than trading within a strong trend as it can get quite complex. Using the key levels as support or resistance within a trend is much more favoured when it comes to long-term trading.
Using key levels as areas is far better than always using fixed price lines. We can use the more dynamic areas of trading zones to find better Forex trading opportunities.
Using a line of best fit
It is common for new Forex traders to experiment with support and resistance levels and where to plot them on the chart. You need to consider a few things when it comes to drawing on zones:
- The number of wicks or touches in a certain area;
- The time frame you are on;
- Nearest round levels.
Once you understand the overall trend on the higher time frames, then you can plot the immediate daily support and resistance levels and use them on the lower time frames.
When support becomes resistance, and resistance becomes support
Resistance becoming support and vice versa is an action seen during the evolution of a trend and breakout points. This is due to key levels being broken and crossed by price. Once the new high or low is formed, a movement back to the broken key level will occur before a continuation in the trend direction. These are called retests.
Using key levels to set up a trade and manage risk
Trade setups will mainly use key levels to either place take-profit levels or stop-loss levels. Using them to manage risk will help cut losses short if a key level is broken in the opposite direction of your trade.
Psychological levels and round numbers
Psychological levels are price levels that are round numbers, like 1.2000 or 1.2500. Round numbers can frequently help you as support levels or resistance levels. Some currency pairs even carry the trait of magnetising to these levels when nearing them. When it comes to technical analysis, the higher the time frame, the more important the round numbers are.
Where we can find value with these psychological levels is when prices have resisted or been supported at these points in the past. This can tell us that those levels will carry more significance when being met. Many Forex traders will even use these levels as a stop-loss, so this is something to consider when trading to them.
Trading ranges and zones are important for building structure when you are Forex trading on multiple time frames. If a certain price has been met in the past, then it is likely to occur again. The quality of your support and resistance will form the base layer of good or bad technical analysis.
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