How to Use Horizontal Levels and Price Action to Trade Forex

08/06/2014 9:00 am EST

Focus: FOREX

In this article, the staff at FXTM highlights the two scenarios when horizontal levels and price action can often lead to forex trading opportunities and the instances when they most likely won't.

While there are numerous forex trading strategies, perhaps one of the simplest-and most successful-is to use horizontal levels and price action. While there are more complicated strategies, many successful professional forex traders use this approach as the core of their own strategy.

To know how this strategy works, it is important to understand exactly what a horizontal level is and why it is important. In essence, horizontal levels are price levels that represent either resistance or support in the market. For instance, a price may fall to a support level, at which point buyers step into the market and create demand, driving the price up again. Similarly, when a price rises to a resistance level, traders start to sell to lock in profits, creating downward pressure.

In some cases, a price will oscillate between a lower support level and an upper resistance level for an extended period of time, creating opportunities for trading in the channel between the two levels. In other cases, the price will break through a level, return to the level, and then reverse again. In this case, the role of the horizontal level changes-an old resistance level becomes a new support level-or vice versa. For instance, a price might rise to a resistance level and break through it, fall back to the resistance level and then start to rise again. When this happens, the old resistance level starts to act as a new support level.

Both of these scenarios offer trading opportunities. In the case of a channel, a potential opportunity occurs when the current price hits the upper or lower range of the channel. For cases where there is a breakthrough, a potential opportunity happens when the price returns to the horizontal level that the price broke through. For instance, if a price breaks through a resistance level and then returns to that level-now a support level-this may offer a high-probability trade.

However, not all of these cases are trading opportunities. To determine whether there is a likely opportunity, traders need to look for price action at these points. Essentially, these are major market price events, such as a pin bar reversal. When these happen in combination with one of the channel or breakthrough events at a horizontal line described previously, then there is a high likelihood that a profitable trading scenario may follow.

One good example of this is when a price drops to a support level, followed by an inside bar breakdown that leads to the price breaking through the support level. If the price then declines further and then reverses upward, the trading opportunity occurs when the price hits the horizontal level it broke through. At this point, further price action is a high-probability signal for trading.

By the Staff at FXTM

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