Touch trading forex strategy

How does Touch Trading work?

Touch trading strategies involve setting orders within a market based on a traders understanding of where price action is likely to occur. There are broadly two forms of touch trade, one where a trader looks to scalp several pips from a relatively significant support or resistance zone and the other where forex traders look for larger swings and reversals at highly significant levels. Much of the skill involved in touch trading is therefore being able to identify and define the areas of support and resistance which are likely to cause enough price action for either a rapid scalp or longer term reversal.
Pinpointing the highs and lows of the previous day’s trading can provide good opportunities to set touch trade orders, especially where support or resistance has been strong enough to completely reject the price. The stronger the resistance at these levels the more likely that a return to these levels will provide a good opportunity for price to stall, and possibly even reverse, once again.

In order to keep stop losses as small as possible, forex traders using touch trade techniques need to strictly define when a touch trade has failed. Luckily, this becomes fairly apparent as soon as price moves beyond the support and resistance zone, or if price fails to react at these levels. Stop losses can therefore be kept narrow at least maintain a 1:1 risk to reward ratio.

Key areas and reconfirming the forex trade signal

Forex touch trades can also be located at key psychological levels, where large number of orders are placed, such as round numbers or Fibonacci replacement levels. To reinforce a trading signal at these zones, some traders may prefer to wait for positive price action confirming the trade. The use of candlestick analysis at these points, on the 1 minute timeframe, can confirm that the zone is proving suitable support or resistance to enter a trade. For those looking to scalp pips at these points, using a touch trade immediate entry will allow a handful of pips to be gained before confirming price action is available and is therefore a higher risk, but frequently rewarding, method.

Touch trading breaks of support and resistance

Another form of touch trading which can be very profitable is the retest of a support or resistance level which has just been broke. Looking on short-term price charts, these opportunities arise when price breaks through a support or resistance zone with minimal price action. Often price will overshoot this level as forex traders push through the level and close out their previous positions. The momentum will then stall as price pulls back to the support or resistance zone and will often test this before continuing in the direction of the breakout. This method is most effective on areas which have previously demonstrated themselves as both support and resistance. Simply drawing horizontal lines on price charts at these points will make any breakthrough easy to spot and provide the precise level for a trader to apply limit orders once the break has occurred.