Foreign Exchange: False Breaks
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July 24, 2009
Often in trading we will analyse a market using our Gann analysis, make some calculations and determine a price level that looks like it will provide support or resistance in the market.
Sometimes the market pulls up exactly on these levels, sometimes it will pass through by a few points, and sometimes it will ignore our levels altogether!
In previous Trading Tutors Newsletter articles I have quoted WD Gann from page 36 of How to Make Profits in Commodities regarding the all important "50% rule" but I will write it again here: "you can make a fortune by following this one rule alone."
Let's take a look at two recent 50% levels on the US Dollar / Japanese Yen Currency Pair (FXUSJY in ProfitSource). In Chart 1 below, we have the 50% level of the range from the January Double Bottoms up to the April top coming in at 94.29.
Chart 1 
click here to enlarge
In Chart 2 below we have the 50% level of an ABC Short trade that came up this week coming in at 94.35.
Chart 2
click here to enlarge
This gives a price cluster to watch around the 94.30 level.
In Chart 3 below, we can see the market bounced off the 50% level twice, in March and May this year. Each time, the market broke through this level but could not close below the level. In each case, this is what we would call a "false break."
Chart 3
click here to enlarge
In Chart 4 below, we can see the market finally broke through this 50% level, before coming up to test it again. As the old saying goes, "old support can become new resistance." The market managed to break back above this level for one day but could not hold above it - another false break.
Chart 4
click here to enlarge
Note that the market spent four trading days around this level but was still unable to close above it. That is a good sign that Monday's price bar, which opened and moved up strongly before falling away and closing back below the 50% level, was a false break.
Unfortunately we don't always know if a move is a false break until the end of the day, when we see the closing price, which is another reason I prefer to base my trading decisions on End of Day data rather than intra day data.
Be Prepared!
Mathew Barnes
Trading Tutors Team
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