Learn forex trading based on a proven, tested and simple forex system. Support and resistance levels are used by investors to determine how far they believe a currency pair will move. This also tells them at what points the price action may turn around and start moving in the opposite direction.
But sometimes, there is a fundamental shift in the markets. The markets are strong enough to cause a currency pair to break through a previously established support and resistance. When a previous support and resistance level is broken, new levels are established by the markets. Plus, the broken levels may still have some influence on the markets in the future.
Sometimes there are attempted breakouts. This is also known as False Breakouts. It will become obvious to you that prices do not always stop at exactly the same points each time. So if you are going to set up stringent requirements for your support and resistance levels, those levels may not hold up. You would fake yourself out of a lot of valid price movements.
Even when you take all the precautions with your support and resistance levels, you may fall victim to a false breakout. Now, you will ask how I can tell when the price has truly broken through support and resistance in a new direction.
There are two methods that help you screen out a false breakout with a true breakout. Setting price-amplitude benchmarks and identifying role reversals.
Setting price amplitude benchmarks involves analyzing a chart to determine if you can identify when the price momentarily broke through the prevailing support and resistance level before pulling back and once again returning to the previous level.
The dips through the predetermined levels are usually short lived. You can draw a secondary support and resistance lines which you can then utilize as your price-amplitude benchmarks.
A price amplitude benchmark will tell you if the price has broken through the predetermined level but did not breakthrough the benchmark; you don’t have to worry about a change in the trend direction. However, if the price had enough momentum behind it to breach the benchmark, it can continue in the new direction.
Identifying role reversals involves watching for support levels to turn into resistance levels and resistance levels to turn into support levels. All too often, you will see the price bounce off a level of resistance, turn around and start heading lower and bounce off the previous resistance level.
When a resistance level is broken, that same level will turn into a support level. Conversely when a support level is broken, that same level will turn into a resistance level. You should use both the benchmark and the role reversal confirmations in your trading analysis to screen out false breakout from a true breakout.
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