Hi, I was reading the “school” article concerning Support and Resistance Levels (Elementary level, can’t post link due to newbie status), and found this passage a bit confusing:
Instead of simply buying or selling right off the bat, wait for it to bounce first before entering. By doing this, you avoid those moments where price moves fast and break through support and resistance levels. From experience, catching a falling knife when trading forex can get really bloody…
How bad is it if you fix your entry position on the support line, and the price blows past it? I am assuming you can set a stop loss order.
You can enter on the support but yes, you would definitely want to put a stop loss in place to protect your capital. So if you had a take-profit level in mind, you could place a “set & forget” trade.
Ideally you would set an alert to go off as price approaches the support, you could then analyse the market & see how strong price is approaching the support. If you’re getting strong big candles, price might very well move clean through the support so you could cancel your order if you thought that would be the case. If not & your order is triggered, a move through the support will soon trip your stop-loss.
Always wait for the candle to close as well. Price may very well surge below the support only for buyers to come in & push it back up (forming a pin-bar rejection candle) which is why, if you did enter on support, your stop-loss goes below it. The distance will be subjective to the individual & the system: too tight & you may get stopped out before price moves your way, too far & your risk/reward ratio is poorer & you’ll not earn as much. Trial & error.
I agree with baz, it is a matter of finessing it in such a way where “the trap”, as I call it, would be beneficial for you. Don’t forget to also take into consideration the big picture, are there also other points of support that was tested earlier on? After all, support (or resistance) is only evident when there is at least one other point of reference. Like it says in the school, a confirmation of S/R is when there are 3 points of reference. So make sure you check out the longer term charts and ensure that there are/aren’t other points of S/R in play.
Even then, there is no guarantee that the S/R will hold, the only thing keeping you safe is good money management, stop loss, good risk/reward ratio, etc. In the end, it is probability that will make the day.
Appreciate your response. I’ve been thinking a bit over your reply, just wanted to cover a few things:
You said it’s fine to enter on the support line so long as you set a stop-loss below it. So do you also mean the quoted advice above about “waiting for an actual bounce” presumes I didn’t set a stop-loss? This puzzles me as the article still recommended a stop loss just below the bounce (entry) point.
Can you clarify what you meant by “wait for the candle to close” ([I]trading period to close?[/I]), as well as “big strong candles” ([I]tall trading range?[/I]).
In my opinion it is very important to trade with more than one trading signal. So if price approaches S/R that can be one trading signal, but that by itself is a very weak signal. I always look for multiple signals which can drastically reduce entering a trade which will go against you.
[QUOTE=“catskin;668824”]Appreciate your response. I’ve been thinking a bit over your reply, just wanted to cover a few things:
You said it’s fine to enter on the support line so long as you set a stop-loss below it. So do you also mean the quoted advice above about “waiting for an actual bounce” presumes I didn’t set a stop-loss? This puzzles me as the article still recommended a stop loss just below the bounce (entry) point
Can you clarify what you meant by “wait for the candle to close” (trading period to close?), as well as “big strong candles” (tall trading range?). Thanks a lot! [/QUOTE]
In terms of all trades, whether using support/resistance, fibs, moving average cross-over or the illustrious coin-flip - ALWAYS use a stop loss. You need your stop-loss position in order to calculate the correct position size so it’s a must for each & every trade. Decide where you SL goes BEFORE you even place a trade.
Trading varies from person to person so you’ll get varying degrees of risk amongst entries so some may enter as it surges below support - they might get a good entry price but they’re relying on the support holding. Personally, I’d rather some form of confirmation that the support was holding before I’d trade it. My entry price & risk/reward may not be as good this way, but I would deem it a safer trade.
For this example, we will assume that we are look at an hourly chart. Price might reach your support level at 10:24am & surge considerably below it. However that candle won’t close until 11am & in that time, price might be rejected off the support as buyers come back in to the market pushing price higher. Or worst case scenario, the candle closes below the support & it turns resistance & boom, price is going the complete opposite way from what you predicted.
By big string candles, I mean candles that have a large body to them. Look at it in terms of momentum, if there’s a lot of selling power, you’ll get large candles & if it’s large candles all the way down to the support level, price will probably blast right through. If the support level is likely to hold, you may see the selling power ease off as it approaches the support as bearish traders take profit &/or other buys coming in to push price back up. Therefore the candles would decrease in size. Follow?
Think of support/resistance as a physical brick wall & the candle size is relative to a vehicle size. There’s no guarantee that a small vehicle won’t break through the wall but the likelihood of it happening is decreased as the vehicle/candle size does.
So to wrap it up & bring these two points together (& this is just my opinion): I would have an alert as price approaches the support, analyse the strength of the market as it moves down (candle size), if I’m trading the hourly chart, I’d wait for that candle to close to see if it closed above or below the support. If it’s below, my trade is invalid, I’ve not entered anything so I lose nothing. If it was above, I may have a trade - it depends on the system. Ideally I’d hope for a pin-bar to have formed in which case you could enter a trade. Entries vary, you could go in at the open of the next hourly candle with your SL below the wick of the pin-bar or you could put an order in place & hope that price goes down a bit to retest the support before going going up again. The latter would give you a better entry price, a greater risk/reward but may not get triggered if price decides to just keep going up. The variables are endless so it’s hard to give any set in stone advice so my advice is to practise & experiment & see what works for you.
I hope this makes sense, looking back, it seems quite long winded & after a rather sleepless night (there’s an ill little person in my house) reading it back is more like looking at words as opposed to reviewing what I written. I’m far from an expert, these are just my thoughts & I’ll do what I can if you have any further questions.
Define really strong S&R make entries before price reaches them (expecting in your opening trade REVERSE movement of course), set SL 4-5 higher than R and 4-5 lower than S. The reason of doing this is SLIPPAGE that occurs in 90% after bounce from strong S&R. First you can lose some easy pips, and second get ripped off by unfair broker with assymetrical slippage for example. Got tricked two times on FXCM before moving to a normal Hotforex trading…
I can’t speak for other brokers, but FXCM offers trader on No Dealing Desk (NDD) forex execution where orders are filled using the best available prices from 10+ competing liquidity providers. While slippage is a risk of trading in any market, it’s worth noting that with FXCM, slippage can be either positive or negative.
Positive slippage is when your order gets filled at a better price than you requested. Below are the stats from over 43 million live trades executed through FXCM from August 2013 to January 2014. In just those six months alone, FXCM clients benefited from over $15 million in positive slippage.
[ul]
[li]73% of all orders had no slippage.
[/li][li]15% of all orders received positive slippage.
[/li][li]12% of all orders received negative slippage.
[/li][li]Over 60% of all limit and limit entry orders received positive slippage.
[/li][li]53.32% of all stop and stop entry orders received negative slippage.
[/li][/ul]
Note that positive slippage is more likely to occur with limit (AKA take profit) orders, while negative slippage is more likely to occur with stop (AKA stop loss) orders. That’s due to the momentum of price movement when those particular order types are triggered.
It’s also worth noting that for market orders, Trading Station has a feature called Market Range that allows you to specify how much negative slippage you’re willing to accept on an order if any. For example, if you set your Market Range to 3 then you market order will only be filled if the best available price in the market is within 3 pips of the price you clicked on. Otherwise, your market order gets canceled. Note that this feature only limits your negative slippage. You’re still able to benefit from any positive slippage even if it’s greater than 3 pips. The following video has more info on how you can use the Market Range feature.
