Dancing with the Lines

False Break – Support and Resistance Analysis


Jul.19.2013

When is a break not a real break? When it’s a false break! Sometimes the currency pair gets naughtier than just testing a support or resistance level with its shadows as we saw in Figure 11-7 in Invest Diva's Guide book.

 

The second point of the IDDA includes constant research for key support and resistance levels. Support and resistance are thought of as limitations for the currency pair to dance freely on the dance floor. All we need to do it to identify the support and resistance and use them to our analysis. If we figure where the pair is likely to stop moving further, we can make a better investment decision.

Support and resistance are two of the most discussed concepts in Technical analysis. They can come in various forms from very basic ones to more advanced and exciting ones.

We look for breakouts so determine the next level to watch out for. However, sometimes the breakouts are fake.

False Break of Support

Look at the example in Figure below.

 

False Break - Technical Analysis Support and Resistance Example False Break - Technical Analysis Support and Resistance Example

After testing the support level a couple of times, the prices actually closed below it, getting the traders all excited.

 

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The pair was probably secretly laughing when it heard the traders behind the computer shouting:

“It broke the level!It broke the level!” After having fun below the support level for just a little bit, the two of them moved back to where they had been before. And guess what? Sometimes a false break is actually a signal that an actual breakout in the opposite direction may come along soon! Those naughty pairs!

Look what happened after the false break in the image above.

False Break of Support Example False Break of Support Example

After the false support break, the pair found a way to break the resistance. And this time the two of them were not kidding. The market went all the way up to a previous key resistance level after that, and broke it.

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Related:

 

The Breakout Education - Forex Coffee Break Course

 

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