Dancing with the Lines

The Breakout – Support, Resistance Analysis


Jul.19.2013

The breakout sounds like an action movie about prisoners. But we are still talking about the second point of the IDDA. Technical analysis. As my friend Fan Yang, CMT, the chief technical strategist at FXTimes, puts it, any obstacle in life will eventually break, and so do support and resistance. In fact, sometimes the currency pairs not only completely break the barriers, but go all the way out of line. That is when you know that the trend is here to stay, and that the door has opened for further rides on the previous trend. If the pair breaks the line, it may indicate the continuation of a trend; the pair was just so comfy riding on the trend that even the strongest obstacles couldn’t stop it! This is called a breakout.

The Breakout

The breakout of Support - Forex Chart The breakout of Support

The support and resistance levels usually are not specific prices, but more like zones.

What’s Behind the Breakout?

As much as the currency pairs want to behave, dance beautifully on the dance floor, and make it easier for traders to anticipate their next movements (yeah, right!), they often act in a chaotic manner. This is because there are so many different things that can change the beat of the market. Just imagine that you and your partner are trying to practice dancing on a dance floor, but the music keeps changing. Just when you start getting comfortable dancing the tango, the DJ changes the beat to salsa. I bet you would become rebellious and break all kinds of barriers.

 

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In the currency market, sometimes the fundamental news about the economy of the country of one of the currencies drives prices insane, and the currency falls down, breaking all the support levels. Sometimes important news out of either country can shake things up.

Other times, the superpower traders move the market with their gigantic trades. They get into a head-to-head battle and drag the poor pair around with no clear direction. The buyers (or the bulls) push the prices higher, while the sellers (the bears) lower them. The battle goes on until one side wins and forces the pair to cross the support or resistance level.

resistance-level

After a Long Battle, the Bulls Finally Win and the Pair Breaks the Resistance.

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The Breakout Education - Forex Coffee Break Course The Breakout Education - Forex Coffee Break Course

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