In today’s article, I’m going to share with you two support and resistance trading strategies you can begin using to make money from the forex market. The two systems I’ll be showing you in this article are very simple to use, which makes them a perfect fit for a beginner price action trader. All they require is that you already have a small understanding of what support and resistance levels are, (which you can easily gain from my article), and you know how to draw the levels on the chart correctly.
Before we start, I suggest you take a quick read of my article on pin bars and my article on engulfing candles, as these are the price action patterns we’re going to be using in the two support and resistance trading strategies I’m going to be showing you today.
Strategy #1 Trading Pin Bars At Support And Resistance Levels
The first strategy I’m going to be showing you today, is how to trade pin bars at support and resistance levels. As some of you probably already know, a pin bar is a price action reversal pattern which forms frequently in the forex market. It’s a pattern which can form either as a result of the bank traders taking some profits off trades they’ve already got placed, or from getting new trades placed to cause the market to reverse.
Seeing a pin bar form at a support or resistance level is a sign the bank traders have decided to undertake one of the actions mentioned above. Most of the time it’s not possible to figure out which of the actions is causing the pin to form, but it’s not really an issue because they both usually cause a decent sized reversal to take place.
Step 1 – Mark The Support And Resistance Levels On Your Chart
Step 1 in trading pin bars at levels of support and resistance is to mark all the levels you plan on using to watch for entries into trades on your chart. If you don’t know how to draw support and resistance levels read the two articles listed below before continuing.
Step 2 – Wait For The Pin Bar To Form At One Of The Levels
When the market comes back to one of the levels you’ve marked, you’re going to want to see a pin bar form, but not just any old pin bar. You need to see pin bar form which has a high probability of working out successfully. Some of the pin bars which form at support and resistance levels don’t actually have a good chance of causing reversals to take place. They’ll form, and either won’t cause any reversal to occur, or will just create a small reversal, after which the market will start moving against the pin and end up breaking past it’s high or low (depending on if it was bullish or bearish pin bar).
To avoid trading these low probability pins, I suggest you only trade the pin bars which have their wick stick out from the surrounding price action.
You can clearly see how it juts out from the price action which formed before it. These are the types of pin bar you want to be looking to trade at support and resistance levels.
You can see that this bearish pin doesn’t stick out from the price action which formed before it, and subsequently does not cause a reversal away from the resistance level to take place. This is a prime example of the types of pin bar you want to avoid trading at support and resistance levels. If a pin doesn’t obviously stick out from the recent price action, it’s probably not going to result in you having a successful trade, so it’s best move on and look for other opportunities.
Step 3 – Enter Your Trade With A Stop Loss Below The Low Or Above The High Of The Pin
Step 3 is to actually enter the pin bar trade at the support or resistance level. This is always done just after the pin bar itself has finished forming on the chart. What I mean by this, is that if you were observing a pin bar form on the 1 hour chart, you would wait until the hour has come to a close before entering your trade. You wouldn’t enter before the hour was over, because there’s a chance the price could still change and cause the pin bar to morph into a completely different candlestick, which has no chance of causing the market to reverse.
To enter the trade you need to use something called a market order. A market order is the type of order which places your trade instantly without any delay. Some price action websites and books suggest entering pin bar trades with pending orders placed either at the high or low of the pin, but this isn’t really a great method, and will often lead to you missing out on lots of trades which would’ve been profitable had you just entered using a market order.
When you enter the trade you also have to set a stop loss, so as to make sure you’ll only lose a small amount of money in the event things not working out correctly. Setting the stop loss means defining a point in the market where the price shouldn’t move if the pin bar trade is going to be successful.
For bearish pin bars this point is always just below the low of the pin, and for bullish pin bars it’s just above the high.
If you were going to trade this bullish pin bar you would first wait until the candle has closed before entering a buy trade using a market order. When you’re in the process of placing the market order you need to set the point where your stop loss is going to be placed. This point is always just below the low of the bullish pin bar, somewhere around the point where I’ve marked the black line in the image.
To enter this bearish pin bar trade you basically follow the same process I’ve listed above. You wait until the bearish pin bar has formed by allowing the next hour to begin, and then as soon as it’s begun you use a market order to a enter a sell trade with your stop loss above the high of the pin, close to where you can see I’ve marked the black line.
Step 4 – Taking Profits And Closing The Trade
Once you’ve managed to get yourself into a successful pin bar trade, the next task is for you periodically take profits off the trade so as to secure some of the money you make from the market moving in your favor. Taking profits should be done whenever the market makes a new lower low, if you’ve placed a sell trade based upon seeing a bearish pin bar form at resistance, or after the market makes a new higher high, if you’ve decided to place a trade after seeing a bullish pin bar form at support.
Choosing when to close the trade completely really comes down to whatever your own personal preferences are. I always try to hold my trades open for as long as possible, but I know that a large number of traders like to set targets to close their trades at predetermined points, so really it’s up to you to decide when to close your pin bar trades.
Strategy #2 Trading Engulfing Candles At Support And Resistance Levels
The next trading system I want to show you, is based on watching for engulfing candlesticks to form when the market returns to support and resistance levels. Engulfing candles are of course very similar to the pin bars we have just looked at, in that they are both price action reversal patterns which are supposed to signal a reversal in the market. The fact they are so similar to one another means the steps you have to go through to trade them are basically the same as the steps we just went through in the previous section.
Step 1 – Identify And Draw The Support And Resistance Levels On Your Chart
Again, just like you do when trading pin bars, the first step to trading engulfing candlesticks is to mark all the recent support and resistance levels on your chart. You don’t have to mark every single level which exists in the market, you just have to mark the ones which are found closest to the current price action.
Step 2 – Watch For Engulfing Candles To Form At One Of The Levels
Just like pin bars engulfing candlesticks do not all form alike. Some have a high probability of causing the market to reverse away from support and resistance levels, whilst others have a low probability of causing a reversal to take place. Typically speaking, the small engulfing candlesticks which engulf similarly small candles have a lower probability of causing the market to reverse than the big engulfing candles which end up engulfing candles of a similar size.
You can see how this engulfing candlestick does actually cause the market to reverse, but only for a short duration of time. This is common of all small engulfing candles that form in the market. They often cause a reversal to take place, but usually the size of the reversal they create won’t be enough for you to make a decent amount of money off the trade.
These types of engulfing candle tend to work particularly well when it comes to trading engulfing candles at support and resistance levels. The one in this image causes quite a large reversal to take place right after its formation. They won’t all create reversals as big as the one you see here, but they’ll usually all cause some kind of large movement to occur.
Step 3 – Enter The Trade And Set Your Stop Loss
Once you’ve seen a high probability engulfing candle form at a support or resistance level, the next thing you need to do is enter the trade. Entering an engulfing candle trade is the same as entering pin bar trades. You don’t enter the trade until you see that the engulfing candle has fully formed, (i.e you wait until the next candle has opened before placing your order), and you enter the trade itself using a market order.
Also, like pin bars your stop loss on engulfing candle trades will go above the high of the engulf, if you’re trading a bearish engulfing candle, or below the low of the engulf if you’re trading a bullish engulfing candle.