Concept:waiting for price to break.

I am a beginner to forex trading and I've seen this statement made.

Say you think that the currency will move in a particular direction - i see quite often about if price breaks such and such level then go short, or go long.

This is based upon support and resistance right?

But what is the significance of the level? It seems as if it's a type of confirmation, but I wonder if it breaks by 1 pip and then reverses you get stopped out maybe.

To use this there must be a statistical correlation between the break and the
expected direction, surely we should know what that is, or doesn't it matter?

I'm just trying to get my head around it, fully that's all.

Thanks if you have any ideas or stable info on this.

Price breaks of support/resistance can be the most explosive of all moves.

OK. Bare with me for a few seconds.

I'm not sure of what you already know, so excuse me if this first bit is a bit of a rant...

This is just about chaptor one of Technical Analysis.

Wether you wait for price to break the given level by 1 pip or 5 pips or even more is the tricky bit and can depend on the time frame.
You just need to play a bit.

When you find a signicant support level...
... one that has shown in the past to be a significant barrier to price progressing lower...
...you know you have a great base for a possible trade.

Before placing a trade, you need to evaluate wether there are any other significant support levels below that level that will prevent you from acheiving a reasonable profit if price decides it aint going any lower.
This has to be balanced with how far upwards your stop-loss level is in relation to that level (Risk to Reward)

It's the basis to all T/A. If you don't spend time looking through your available time frames checking for possible support/resistance areas (including trend lines & pivots fibs etc) you are flying blind.
They act as a great road map.

As you mentioned... When you see that statement made, it may be mentioning a major level that can't be seen unless you zoom out to a larger time frame.

The most signicant levels are the ones on the weekly charts or higher. OR, when a level is hit on the daily charts many many times.

A REALLY good example you can check out is the USD/JPY i've attatched below.

This is a weekly chart.

The red line, the 109.00 level, would easily be considered a very important level.
Plot it on your USD/JPY chart and then zoom out further and scroll back through the past. The small snippet I've shown here is nothing. It's a major psychological level if I ever saw one!

How would you play it??

The best trade is one where price broke down through that level then rallyed , and then FAILED to go back up through (the best would be total resistance)). If you went short at this point you would be a taking a trade that is pretty strong from a technical standpoint.

You can also trade the first break, but it is a less probably trade, since you are at risk of a stop hunt spike down that reverses and never goes back down again. You end up sitting on the sidelines watching your short trade go deeper into loss as price accelerates back up!!

Of course reverse all that for resistance levels.

Hope I've cleared it up a little for you.

Of course this works on even the smallest of time frames too.

You will also often hear "Support Area" "Resistance Area" mentioned.

A lot of major levels are loosely based around a particular price, but may allow minor penetration without technically being a strong break. Normally the larger the time frame the more this is true.

You may find that price will stop cleanly at 109.00 or penetrate by a pip or 2. Sometimes though there may be a secondary level below that.

Let's say 108.90 or whatever

This happens because of the yummy stop orders that are generally sitting just below a major support area. There will be brokers/banks etc trying to use their power to push down through and trigger stops.

It's a a really good reason to wait for a retest of the broken level before entering a trade.

It's hard though, fighting that urge to "not miss out on the action!!", but it REALLY is worth waiting for the better set-up.


BTW, You can see another level above it at the 113.50 area, and more.

Thanks Bundyraider.

That's a good explanation. I'm going to go through it thoroughly. I knew it was one of the basics that's why I just thought heck, I'll just ask the question. Everything I have learn't in forex seems to be a surprise, like WTF I didn't know that at all but I was assuming something else.

I have noticed the patterns but haven't been checking weekly charts for example - woops.

Even if I knew it all, I still like seeing what other people think. Sometimes you need to go over and over something before it sinks in to a point you can apply it

Cheers.

Yeah, trying to get used to the surprises myself!

Tell me about it!

Check out this site:

IncredibleCharts

The link I've given takes you straight to the support/resistance page, but even besides that, it's a wealth of free information on everything from indicators to chart patterns. Make sure you scroll right to the bottom of that page too and check out some other short articles in the "Related topics" section too.

It's a site for a subscription based chart program, but the info is totally free. There has been so much effort put into the free information it's almost a one stop for it.

There's a menu/list on the left.

For interest sake, check out the "Tricks of The Trade" section. Reading that gives you an idea of some of the dirty tricks that are used and puts you in better mind to be ready for them. At least a little. LOL