Resistance Becoming New Support

Filed under: Learn Forex Trading |

One of the tools that I use to find high probably forex price action trades is the fact that levels of resistance often become a new level of support. Figure 1 visually explains this phenomenon.

 

Figure 1.

As you can see, price had been respecting the first resistance level before breaking through. Then, this old resistance level then become the new support level, with price bouncing off of this level before moving further up. This phenomenon also happens in exactly the same way when price is moving down.

 

Now, it should be noted that this kind of action does not happen every time price moves up or down. However, what we can do to improve our chances is to look out for any price action signals (in the form of pin bars, inside bars, or engulfing patterns) at these significant levels. This is exactly what I did on today’s live trade (see article on the USD/CHF pair in the ‘live trades’ section). If you look at Figure 2, you will again see that price moved down, formed a resistance level, broke through that resistance, and then this resistance level then became the new support level. So when a price action signal formed at this level (in the form of a bearish engulfing pattern) this confirmed that the level was likely to hold – and that a trade could be speculated upon.

 

Figure 2.

Support and resistance levels are extremely powerful tools to have in your trading arsenal when trading the forex markets. Support and resistance is particularly well respected in the forex markets, and this combined with using price action signals as confirmation, can give you some really high probability trades. Of course, you also need a positive risk-reward scenario to make any decent profits, and this is something that has been covered many times in past articles. But when it all comes together, trading forex can be fun, satisfying, and of course, very rewarding indeed.

 

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