Trend, support and resistance
What you learn in 3 minutesA reader asked: "If price bounced off the same level three times, why did it break through on the fourth?" This lesson shows how those levels are found on a chart and why the fourth touch often behaves differently. On USD/ZAR at around 18.4100, a move of 100 pips on 0.10 lots is about R100, so where you place your stop changes what a losing trade costs in rand.
Three touches, a fourth break and a R150 stop
| Step | Amount | Note |
|---|---|---|
| Support level | 18.4100 | The price where USD/ZAR turned up three times before. |
| Stop distance below support | 15 pips | Placed just under the level so normal noise does not close the trade. |
| Position size | 0.10 lots | One mini lot on USD/ZAR. |
| Value of 1 pip on 0.10 lots | about R1.00 | Pip value varies with the USD/ZAR rate and the broker's contract size. |
| Cost if the stop is hit | about R15.00 | 15 pips x R1.00 per pip. |
| Cost if the stop is 150 pips away | about R150.00 | 150 pips x R1.00 per pip; a wider stop costs more for the same size. |
Brokers may round pip values, add spreads and charge commission on top, so the rand figure you see can differ.
The mistake people make here
The common mistake is to treat a support level as a promise that price will turn again. It is only a place where orders have clustered before. On the fourth touch, those orders may already be filled, so price can pass straight through. Instead of assuming a bounce, decide in advance what a break would cost you in rand and place your stop where that cost is acceptable.Check yourself
If your stop is 20 pips away on 0.10 lots of USD/ZAR and 1 pip is worth R1.00, what is your risk in rand?
20 pips x R1.00 per pip = R20.00.
You want to risk no more than R30.00 and your stop is 15 pips away. What position size keeps you inside that limit if 1 pip on 0.10 lots is R1.00?
R30.00 / 15 pips = R2.00 per pip. That is 0.20 lots, because 0.10 lots gives R1.00 per pip.