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USING SUPPORT & RESISTANCE AS RISK CONTROL INDICATORS

Identifying support and resistance is part of any complete technical analysis session, and finding proper levels and zones can help you to better apply money management.

Support and resistance can be excellent risk control indicators as they can help us to determine profitable levels to partially or fully close our trading positions. Bear in mind that these levels become more and more influential as the market tests them over and over again. The more a price tests a level, the stronger that level becomes.

In the following illustration the use of support and resistance levels from a risk control perspective are explained and covered. In addition, the appropriate exit and take profit levels have been highlighted as well.

Money management risk control

As an example we are using the GBPUSD currency pair which offers several noticeable opportunities to utilize support and resistance. It can be observed how - by finding support and resistance levels - a trader is able to effectively recognize exit and take profit levels, helping him increase profitability and reduce exposure.

RECOGNIZING TRENDS TO REDUCE RISK IN TREND FOLLOWING & COUNTER TREND TRADES

Trending markets provide several high probability opportunities to enter the Forex market with a low exposure and a high rate of return in each position taken.

Furthermore, several currency markets have several instances where they present a trader with opportunities to enter trades in the opposite direction of the overall market trend (counter trend trading) and take advantage of minor trends.

Counter trend trades require a substantial amount of expertise since a trader can experience a higher level of volatility and false trading signals. These minor trends can often represent a good source of profitable trades when used properly.

It is important to remember that trades of this nature tend to come with a higher trading risk and will make it hard to achieve good levels of profitability, especially for traders without previous experience and proper training.

The following example presents a few examples of how to minimize the extra risk that can occur in a large number of counter trend trades and trend following trades. Always consider that counter trend trading can be difficult and will take time to master especially under high volatility and market uncertainty conditions.

money management trend patterns.png

In this exhibit it can be observed the manner how trend following trades and counter trend traders occur together and develop the overall trend and its retracements. Trend following trades may be placed after price has tested the bottom trend line and has begun to bounce off of it.

On the other hand, counter trend trades may be placed after price has completed its cycle and starts to retrace to the opposite side and against the overall trend. In this occasion the counter trend opportunities will occur when price starts to retrace. An appropriate take profit and exit level would be close to the bottom trend line where price is very likely to test it and bounce off from it.

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