Trade Gold Trading

How to Use Support and Resistance to Trade Forex

How to Analyze when a Support Level or Resistance Level is broken - In technical analysis, When a support level is broken it becomes a resistance zone and When a resistance level is broken it becomes a support zone.

In the above previous lesson trades examples we have looked at support and resistance levels that were not broken. These points of support and resistance held because they were strong enough.

However, sometimes support and resistances levels aren't strong enough to stop movement of the price moving in a certain direction. When price moves past these support and resistance points we say these levels have been broken. That is why we always use a stop loss order when trading these levels, just in case these levels do not hold.

But what happens when these support and resistance levels are broken, well the levels change one to the other, for example

  • When a support is broken it becomes a resistance level
  • When a resistance is broken it becomes a support level

Using Charts, The Examples Below Show an Illustration of What Happens When These Support and Resistance Levels Break:

Support Level is broken it becomes a Resistance Level

In the example below, using the GBP USD chart, the support level that had been tested two times could not hold the third time, the sellers were able to push the price down past this support level.

However, the price bounced back up again, but this time the price could not go up beyond this line. The price was there after quickly pushed down by the sellers. This was because the line that was a support level had now turned into a resistance level.

In trading when a support is taken out, the stop losses placed below that level are also taken out, thus reducing the momentum that the buyers had. This give sellers an opportunity to short sell the currency and place their stops just above this level which now turns into a resistance level.

How to Analyze Support and Resistance Zones in Trading - Support and Resistance Levels Analysis

Resistance Level is broken it becomes a Support Level

In the example below using the EUR USD chart, the resistance level that had been tested two times could not hold the third time, the bulls were able to push the price up past this resistance level.

When the price tried to go down again it could not go lower than this level. The price was there after quickly pushed further upwards by the buyers. This was because the line that was a resistance level had now turned into a support level. This is what happens in Forex trading or stocks trading, when a resistance level is broken it turns into a support level.

How to Analyze Support and Resistance Zones in Trading - Support and Resistance Levels Analysis

Traders who had closed their short sell trades will now open long trades and place their stop losses just below this level.

Major and Minor Resistance Areas

In currency charts the resistance levels and support levels formed are either major resistance/support levels or minor resistance/support levels.

Broker

Major Resistance/Support levels

In Major Resistance/Support levels price will stay at this level for some time, either the price will consolidate at these major support and resistance levels or form a rectangle consolidation chart pattern when price gets to this point. A major support or resistance level will be tested several times before it is either broken or it holds and the price doesn't get to move past this support/resistance zone.

The above examples are good example of major Resistance and Support Levels.

Minor Resistance/Support levels

In minor resistance and support levels the price will form these points quickly in the short term on the chart & then quickly move past these resistance & support point zones.

Up-wards Trend: The pattern of these minor resistance and support levels will form a series of levels whose general direction is upwards.How to Analyze Support and Resistance Zones in Trading - Support and Resistance Levels Technical Analysis

Up-wards Trend Series of Support and Resistance in Up Trend

Downwards Trend: The pattern of these minor resistance and support levels will form a series of levels whose general direction is downwards.

How to Analyze Support and Resistance Zones in Trading - Support and Resistance Levels Technical Analysis

Downwards Trend Series of Support and Resistance Levels in Down Trend