by Ahmad Hassam

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.

Sometimes, the markets change direction due to a shift in some underlying fundamental factor. The market change of direction due to the shift in underlying economic factors 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 support and resistance levels are established. However, the broken levels may still have some influence on the market in the future.

Often, there maybe attempted breakouts also known as false breakouts! With experience in forex trading, it will become clearer to you that prices do not always stop at exactly the same points each time. So if you are going to use precise requirements for your support and resistance, those levels may not hold up every time. You are going to fake yourself out of a lot of valid price movements that take place.

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 basically two methods that help you filter out a false breakout with a true breakout. They are 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 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 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. What this tells is that you can use both the benchmark and the role reversal confirmations in your trading analysis.

About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.

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