An important thing to keep in mind that support and resistance levels are not
exact numbers.
Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these “tests” of support and resistance are usually represented by the candlestick shadows.
Notice how the shadows of the candles tested the 1.4700 support level. At those times it seemed like the market was “breaking” support. In hindsight we can see that the market was merely testing that level.
Let’s see our same example from above and see what happened when the price actually closed past the 1.4700 support level.
In the first case, price had closed below the 1.4700 support level but ended up rising back up above it.
If you think that this was a real breakout and sold this pair, you will be seriously hurtin’!
Looking at the chart now, you can visually observe and investigate that and make in summery thought that the support has not actually been broken; it is still very much intact and now even stronger.
To help you 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 a 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 times 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 simply replies, “Sorry, it’s just a reflex.”
If you plot support and resistance, you don’t want the reflexes of the market. You only want to plot its intentional movements.
Looking at the line chart, you feel to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.
With a little practice, you’ll be able to spot potential forex support and resistance areas easily. In the next lesson, we’ll teach you how to trade diagonal support and resistance lines, otherwise known as forex trend lines.
Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these “tests” of support and resistance are usually represented by the candlestick shadows.
Notice how the shadows of the candles tested the 1.4700 support level. At those times it seemed like the market was “breaking” support. In hindsight we can see that the market was merely testing that level.
So how do we truly know if support and resistance was broken?
There is no specific answer to this question. Some say that a support or resistance level is broken if the market can actually close past that level. However, you need to look for the thing that this is not always the case.Let’s see our same example from above and see what happened when the price actually closed past the 1.4700 support level.
In the first case, price had closed below the 1.4700 support level but ended up rising back up above it.
If you think that this was a real breakout and sold this pair, you will be seriously hurtin’!
Looking at the chart now, you can visually observe and investigate that and make in summery thought that the support has not actually been broken; it is still very much intact and now even stronger.
To help you 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 a 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 times 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 simply replies, “Sorry, it’s just a reflex.”
If you plot support and resistance, you don’t want the reflexes of the market. You only want to plot its intentional movements.
Looking at the line chart, you feel to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.
Other interesting tidbits about forex support and resistance:
- 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.
With a little practice, you’ll be able to spot potential forex support and resistance areas easily. In the next lesson, we’ll teach you how to trade diagonal support and resistance lines, otherwise known as forex trend lines.
No comments:
Post a Comment