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Forex Education: Old Resistance Turned New Support

Forex Education: Old Resistance Turned New Support

2014-05-07 03:31:00
Jeremy Wagner, CEWA-M, Head of Education
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Talking Points:

  • One common trading tip is using broken resistance as new support
  • AUD/JPY offers a better opportunity because of confluence of support near the same price zone
  • USD/CNH is retesting old resistance turned new support, but that retracement isn’t deep enough for a good risk-to-reward ratio

Technical traders would suggest that identifying levels of support or resistance is a foundation to which a forex trading strategy is built upon. As a result, technical traders spend many hours identifying levels of support and resistance on a chart to trade from.

Newer traders are intrigued by the ability to identify areas of buying and selling pressure on a chart. These levels of support and resistance can act like a floor (support) or ceiling (resistance) for prices. Eventually, these levels will break which offers up a new trading opportunity.

Today, we will look at two examples of resistance and how it acts like new support when broken. In the illustrations used, we will also see how one of the examples presents a stronger opportunity than the second example. Let’s get started!

AUD/JPY Finds Confluence of Support

The first example we’ll look at today is the chart that presents the better opportunity of the two illustrations. This is because we have a confluence of support near the same price level. Not only has the old resistance turned new support, but we also have a support trend line passing through the same area. This is providing an extra layer of support that makes it more difficult for prices to push through.

Forex Education: AUD/JPY Bounces at Old Resistance

Forex Education: Old Resistance Turned New Support

(Created using FXCM’s Marketscope 2.0 charts)

On the chart above, we see the AUD/JPY found resistance near the same price level in November 2013 and March 2014 near 94.50. Prices did eventually pierce this resistance level of 94.50 and broke higher. Traders who missed the initial break can wait for prices to return to the point of breakout. In this case, traders can wait for prices to return to 94.50 and consider a long position.

In addition to this old resistance acting like new support, there is a support trend line converging upon the same price zone. This provides an added layer of confirmation on the trade that prices are likely to be supported and bounce. As a trader, give me good opportunities at good risk to reward ratios and I’ll be a happy camper.

In this instance, traders could look to initiate a long position near 94.50 placing their stop loss just below the recent swing low (near 94.15). The first target would be the area near the previous highs of 96.00.

Suggested Reading: 3 Forex Courses to Help You Trade Like a Professional

USD/CNH Retraces to Old Resistance

The second example is similar in that prices have retraced to an old resistance level. However, the second example is not as strong of a trading opportunity because we don’t have the added confirmation of another support level in the area.

Forex Education: Chinese Yuan near Old Resistance

Forex Education: Old Resistance Turned New Support

(Created using FXCM’s Marketscope 2.0 charts)

The second illustration is for the USD/CNH. We have been anticipating a sell off for a couple of weeks now as written in our previous article Finding Trends in Trendless Markets Part 1.

As we can see above, the two blue arrows represent areas of former resistance that may act like new support. Prices have sold off and are near that level of support at 6.2200 - 6.2225. It is possible we will see a reaction higher, though I wouldn’t expect the bounce to materialize into anything significant.

That is because this level of support is NOT as strong as the AUD/JPY illustration. When applying the Fibonacci retracement levels to the chart, prices have yet to retrace 23.6% which is considered the minimum retracement of a healthy uptrend. Therefore, we need to look to lower levels of support as being our stronger levels of support.

Therefore, look for the 38.2% retracement level near 6.17 to provide more meaningful support. At that point we can implement a “buy the dip” strategy.

The USD/CNH is now available to trade through FXCM. If you would like to practice trading the Yuan or the AUD/JPY, then register for a free practice account and try the strategies noted above.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX

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