A common method to plot our approximate support and resistance levels is to simply note the highest and lowest prices the market was able to accomplish over a given period of time. As the FX-market tends to remain in a range bound environment a good amount of the time trading day, we can begin to anticipate the next trade with the current range in mind. At times the market will spill over to slightly new highs or lows only to trigger our protective stops before returning back inside its established range. These cases where the market exceeds its lows (support) or highs (resistance), protective stop orders placed too close are left vulnerable to any small spike in the price action. In order to attain the best potential entry price, we may limit or entry orders to those prices slightly below recent lows or above recent highs. Specifically we may employ a 20% rule where entry orders to buy or sell short the market are placed as much as 20% of the current range below support and 20% of the current range above resistance. For example, we can see on the following (1-hour) chart, the EURUSD first established a trading range between 1.2500 & 1.2617 respectively. The market then subsequently spilled over approximately 20% of this range (23-pips) below its lows (1.2477) and above its highs (1.2640). The beauty in this approach is that each one of our trades assumes a minimal amount of risk, while increasing our potential for further upside. One final note; when trading a range such as the one shown below, it is always a good idea to take a portion (50%) of each profitable trade off the table as the market reaches the midpoint of the range, exactly between support and resistance, in order to book in a small amount of profits and reduce our overall market risk.
Best of luck, may all your trades be winning ones?
