Support and resistance levels enable traders to project how far they believe a currency pair will move. It also tells them at what points the price action of a currency pair may turn around and start moving in the opposite direction.
But sometimes, the markets change direction due to a fundamental factor. The market change of direction is strong enough to cause a currency pair to break through a previously established support and resistance level. When a previous support and resistance level is broken by the markets, new levels are established. However, the broken levels may still have some influence on the market 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, you may fall victim to a false breakout. Now, you will ask how I can tell a false breakout from a true one and 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 looking at a chart to determine if you can identify and know when the price action 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 support and resistance levels are usually short lived. You can draw a secondary support and resistance lines through these dips 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 has not broken through the benchmark; you dont have to worry much about a new direction and the change in the trend direction. However, if the price had enough momentum forcing it to breach the benchmark, it can continue in the new direction establishing a new trend.
Identifying role reversals method involves watching the price action to see if support levels turn into resistance levels, then, watching if the resistance levels turn into support levels. Many times, you will see the price action bounce off a level of resistance, turn around and start heading lower and again bounce off the previous resistance level.
Once a resistance level is broken, that same level will turn into a support level. Similarly, when a support level is broken, that same level will turn into a resistance level. You understand both the benchmark and the role reversal confirmations and use both in your trading analysis to filter out a false breakout from a true one.
