How to Trade Forex: Was Support and Resistance Broken?

22
Oct

How do we know if support and resistance was broken?

Forex Trading Floors' How to Trade Forex blog this week follows on from last week's 'Support and Resistance'. Today we will be covering whether we can really know if support and resistance was broken.

Sadly, there is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level, However, you will find that this not always the case.

Let us take our same example from above and see what happened when the price actually closed past the 1.4700 support level.

 

In this case, price has closed below the 1.4700 support level but ended up rising back up above it. If you had believed that his was a real breakout and sold this pair, you would have been seriously hurting!

Looking at the chart now, you can visually see and conclude that the support was not actually broken; it is intact and now even stronger.

To help filter out these false breakouts, you should think of support and resistance more of as "Zones" rather than concrete numbers. One way to help you find these "Zones" is to plot support and resistance on a line chart rather than candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.

These highs and lows can be misleading because often they are just the "knee-jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, he or she simple replies, "Sorry, it's just a reflex".

When plotting support and resistance, you don't want the reflexes of the market. You only want to plot it's international movements. Looking at the line chart below, you want to plot your support and resistance lines around areas where you can see the price forming several peaks and valleys

 

Support and Resistance - What Else to be Aware of:

When the price passes through resistance, that resistance could potentially become support.
The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
When a support or resistance level breaks, the strength of the follow - through move depends on how strongly the broken support or resistance had been holding.

 

Was Support and Resistance Broken Summary:

Filter out false breakouts by thinking of support and resistance as "Zones" rather than concrete numbers.
The highs and lows can be misleading so it is worth practising on a demo account before going live.
Forex Trading Floors offers one-to-one coaching on support and resistance with our Trader Coach either in person or online. There is also a free online radio show for those who would like to join the trading community of trading floor which is live every Wednesday from 8am till 11am.

Please contact us via email or phone 01277 232223 for more details on either coaching or online membership.

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