In previous articles, we explained how to find support and resistance and how to find entry points for support and resistance. Knowing where to exit is just as important as knowing where to enter the market. This article explains how to improve your exit points using support and resistance.
Support is a price area where a falling price may reverse and rise.
Resistance is a price zone where a rising price may reverse and fall.
Where to place your stops
When opening a long (buy) position, placing a stop below support will reduce the likelihood of being stopped out. Analyse the market volatility to determine how many pips are below the support level to set the stop loss. In quiet market conditions, placing one pip below support could be correct. In volatile markets, placing five pips below support could be optimal.
Conversely, when opening a short (sell) position, the stop loss is set above the resistance level.
Where to place your target point
For a long (buy) position, the next resistance level is the target point.
Advanced strategies place the target above resistance and hope for a higher break. If the trend is strong, the market can rise above resistance extending profits. If the market stops at resistance, exit your position immediately.
The strategy is the opposite when holding a short/sell position. Your target should be around support in normal conditions.