We talked a lot about support and resistance levels and how to identify them. Well, it’s time to find out how is S/R going to help us make money. After all, that’s why we want to trade Forex – to make money.
Today we are going to discuss a simple, yet profitable strategy that uses S/R and the RSI. The idea is to identify a good support level and when price touches it and RSI is oversold, you can enter a long position with a tight stop loss.
Look at the picture and observe that when price touched the support level, the RSI was in oversold so both conditions were met at the time we entered the trade. On this chart you cannot see, but the red line is in fact a confirmed support and it’s valid even for the first trade. Here is a zoomed out chart:
Stop loss placement: 15-20 pips behind the support level. Because S/R levels are zones, we must allow some room for the price to move before reversing. The examples in the picture are a best case scenario, where we needed just a 5 pip stop loss, but those cases are rare
Take profit: 40 pips or go for at least a 1:2 R:R ratio. If your stop loss is 15 pips, take profit must be at least 30 pips
Keep in mind that the values for stop loss and take profit will change depending on the time frame you are using.
Conditions to go long: – price touches a confirmed support level and a candle closes above it
– RSI is oversold
Conditions to go short: – price touches a confirmed resistance level and a candle closes below it
– RSI is overbought
Pay close attention to the strength of the level you are trading and don’t take counter trend trades.
Like I said, the two trades presented here are best case scenarios and it’s very possible that price will not reverse at the support level so always risk money that you afford to lose