Look at the E/U chart above. Support at 1.2180 is broken. If we were to trade at this point in time, what would the course of our action be? Buy or sell. Well let's see.
According to many popular forex trading courses and websites, break of support signifies that many sellers are present and it is a sell signal. Most people would probably pull up their Fibonacci tool too and measure some magic number and go short. Before moving on, do yourself a favor and think about what you would do in this situation. Now let's look at what really happened.
The second --- more significant --- support was not even touched and E/U rallied. Until when? Until the next important resistance at 1.2388, where a short was good for 50+ pips.
Let's go back to the first buy though. If you had acted according to what forex websites tell you, you would have been eaten alive by the bull in no time. Period. RSI, at the time of break, was indicating a very very oversold market. Noobs would have sold the break, people with more experience would have probably sold very little, scalpers would have bought and got out for 20+ and pros are probably still holding it with locked in profit.
Of course sometimes things break and continue. However this was at 6pm EST and the market was barely moving. No volume. More often than not, price breaks support to lure in noobs (retail crowd). It starts breaking when pros start selling. Noobs wait for the break and once it happens, they start selling too. At this time, pros are already getting out of their shorts by consuming all selling from the noobs. When noob selling stops, pros continue their buying, price reverses and starts going up, noobs panic and start getting out of their shorts. This moves the price even higher and people who trade price action start playing the bounce by buying. When they are done, pros have already made a lot of money and get out. Then they go play golf for the rest of the day. Noobs start wondering what the hell happened and why they have lost money. Again.
The master of faking breakouts is G/U. Look at the arrows on the chart. 1) support broken, then ridiculous rally (stop now and think about what the chart looked like just before the bounce) 2) perfect bounce 3) resistance broken, then a fall 4) perfect bounce 5) resistance broken, then a fall, 6) detto.
The most important thing I learned this week is that the best trades look scary as hell. In all cases, hourly candles looked very strong (solid bodies) JUST before the bounce. Then a bounce and candles close with long wicks. I used to let my fear get into my way of trading. Seeing a solid candle would have made me trade in its direction after a break of a S/R level. However, as pointed out today, this is a mistake.
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