Levels and zones
Broken levels swap roles
A broken support tends to be treated as resistance afterward, and the reverse.
Widely taught. The Exchange can test it on public price history and will say what it finds.
Widely taught and consistent with order clustering, but no published test of the rule was found.
What it is
After price closes beyond a level, traders who were on the wrong side and traders looking to join the new direction both focus on the old level, which is why a retest of it is watched.
What it suggests
The retest of a broken level is a place where the plan can ask whether the break held.
How to check it
Mark the broken level and watch what price does when it returns.
Common mistakes
- Assuming every retest will hold.
How we will test it
On public price history, never on anyone's account. Until it is done, the note above is all we can honestly say.
- Cases: a close beyond a level followed by a return to it
- Measure: share of retests that hold versus fail
- Window: next 20 bars
- Compared with: returns to levels that were never broken
Sources
- Osler (2003), Currency orders and exchange rate dynamics: an explanation for the predictive success of technical analysis, Journal of Finance 58(5) (abstract or primary page read)
Related lessons
Written in our own words. Education only, not financial advice.