The US Dollar (USD) continues to strengthen since the 1st of July. This has setup some great trend trades in many of the major pairs. The exemptions are the USD which initially strengthened against the Canadian Dollar (CAD) back at the 1st of July but since then seems to be stuck in a trading range. The Aussie Dollar (AUD) has also continued to hold its own against the USD and has been in 2 different trading ranges since April.
In order for trends to exist, support and resistance levels need to be broken. If support and resistance levels do not break, then we are caught in a trading range. When this happens, we can still make trades but not based on trend anymore. Normally we could look at moving average crossovers or both moving averages moving in the same direction to indicate a trend trade. However, if we now see a support or resistance level approaching, we cannot plan on the trend continuing.
Support or resistance trades can be very lucrative if the distance between support and resistance is large enough. The simple rules are to buy at or near support and to sell at or near resistance. On a support trade, we set our take profit at or near resistance. Our stop loss would be slightly below support. For a resistance trade, our take profit would be at or near support and our stop loss would be slightly above resistance. For these trades, we would want to have at least 2x the potential profit (take profit) as our potential loss (stop loss.) The closer our entry is to our support or resistance, the better the ratio we can receive.
The stronger the support or resistance, the more confidence we can have in the trade working out in our favor. However, even if the trade doesn’t work out, our losses should be very small. Any small losses should easily be offset by the bigger gains these trades have to offer.
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