Support resistance dominates outcome of chart patterns: EURGBP example
Chart patterns operate with clear rules; support resistance levels are critical features
So chart patterns are highly documented phenomenon with clear rules. For example there are head and shoulders chart patterns that predict reversal. However reversal is confirmed only when the ‘neckline’ which is a support is broken. In the meantime, price must not exceed the high of the head. I wrote about this very clearly in ‘A chart pattern I see may transform into another: what should I do?‘ There are other patterns like triangles, wedges, flags and pennants. Some may be continuation pattern. Alike the head and shoulders pattern, those continuation patterns also have clear rules: price must break certain resistance or support trend lines before a pattern prediction can be confirmed.
Successful breakout or not?
This gives rise to a predicament: playing trend line breakouts. Jumping a trend line break is not a good way to trade forex because:
- Jumping into a break out play requires excellent timing and judgement.
- There are too many false breaks, fades, traps, stop hunting whatever we call it. Playing trendline break as a consistent trading strategy is just not a method that is conducive the longevity of our trading capital.
EURGBP is at resistance right now; break decisively or bulls suffer a setback
I wrote previously that it is printing a continuation pattern on monthly chart. But continuation or not, it now has to break the resistance trendline on top. If the resistance is penetrated, the prediction is accurate. Failing that, then we will see the fades, traps, stop hunting and what have you. If an individual bought in on a retracement level like 0.8400 or even 0.7800, there is plenty of room to wait and see. But if an individual bought long really high, it is time to tighten the seatbelt and hang on a little bit harder.
While we wait for EURGBP to give us a clear sign, why not read this good story ‘Learn to trade forex: Elements of a trade signal‘ just in case the pair prints a reversal trade signal instead.
Whatever a chart pattern says, it can only happen when the crucial level is broken. For EURGBP, it is at the critical stage now. In order to become a big flag, resistance has to break. So a bull has to sit through this. Yet it is this stage that is also the most dangerous because bears will jump in at any smell of a bearish reversal.