Jul 14 2009
Understand the
forex market. There are some technical formations where the false breakouts are more likely to occur in the currency price charts. You should be able to identify likely false breakouts in order to employ the breakout fading strategy. You need to apply a lot of common sense in identifying a false breakout. Learn
forex news trading.
Head and Shoulders Pattern: This chart pattern is the hardest for new traders to identify. The head and shoulder pattern consists of three points of rallies. The middle rally is the highest with the left and right being smaller. The pattern resembles the head and shoulder pattern of a human. Don’t confuse it with a shampoo. A neckline can be drawn connecting the lows of the left and right shoulders. Discover a revolutionary new
forex robot.
The head and shoulder pattern is usually found in the middle or end of an uptrend. An inverted head and shoulder pattern can also be found in the middle or end of a downtrend. If the head and shoulder pattern is found at the end of an uptrend, it signals a bearish reversal or a consolidation period before the uptrend is continued.
Many traders who have identified the head and shoulder pattern place their stop loss orders below the neckline if they are buying up the rallies from the support level. Head and shoulder patterns are notorious for precipitating a false breakout.
Similarly, traders place their stop loss orders above the neckline of the inverted head and shoulder pattern if they are shorting the decline from the resistance level. Besides the stop loss orders, traders can also place numerous entry stop orders below the neckline or above the inverse neckline in anticipation of a breakout.
The prices will usually rebound and there maybe explosive price movements off the neckline in the pre breakout zone. False breakouts are triggered by the market makers to shake out the positions of small traders most of the time.
It is always best to assume that the first break of a head and shoulder pattern tends to be false. You may choose to place a stop loss slightly below the high of the second shoulder or slightly above the low of the second shoulder. You may fade the breakout with a limit of market entry order a few pips above the neckline or a few pips below the inverse neckline.
Double Top and Double Bottom: A double top formation consists of two rally peaks separated by a valley. The two peaks need not be of the same height. A double bottom is simply an inverted image of a double top. The problem with this chart pattern is also this that it is used by novice traders as a signal for possible breakout.
This makes these traders easy bait for the big players. The breakout fading strategy usually does not work well when the market is in a strong trending phase. It is more effective in range bound markets.
Jul 13 2009
Learn
forex scalping.However, false breakouts just do not happen because of the tricks big players use. They could also be the result of market running out of steam to reach higher highs and lower lows in a sustained price break.Discover a revolutionary new
forex robot.
Develop your own
forex trading system.This can happen when there are not enough buyers in the market to sustain an upward price move or not enough sellers in the market to sustain a downward price move. Since the big players like to fade breakouts, individual traders have higher chances of success if they also fade the breakout.
Everyone wants big easy profits. Profits potential in price breakout is far higher than in a failed breakout. Fading breakouts is counterintuitive. It is not something instinctive. The question is how to identify a false breakout.
You should look for opportunities on a minimum time frame of hourly or more. False breakouts can occur anywhere on the price charts at the levels of support and resistance.
Trendlines are drawn by joining at least two extreme points of high or lows over a long period of time. The price will bounce off the trendline in a false breakout. Probability of a false breakout is higher if the trendline is at an angle or a gradient.
Usually the third or even fourth extreme point of contact on a gently sloping trendline presents a good fading opportunity. The chances of this fading breakout are more if the moving average lies slightly below the ascending trendline or slightly above the descending trendline.
The speed of price movement before the approach to the trendline should also be considered. If the prices are approaching the trendline slowly and gently, the chances of a false breakout or a trendline bounce will be much higher.
The fast and high amplitude approach will most likely result in a successful price breakout of the trendline on the other hand. There will be a sustained follow through in prices due to the high momentum. In such a case, don’t trade it as a likely false breakout.
How to trade a fading breakout? Place a limit or market entry order a few pips below a down trendline or above an up trendline. If you are an aggressive trader, you can stagger your entry orders by placing another order a few pips away from the breakout.
However, you should do it with proper money management plan. Stops should be placed at least 20-30 pips beyond the support or resistance, away from the price zone. This will make your average cost of entry more favorable for either your long position or your short position. Now there are a few chart patterns that are ideal for identifying the false breakouts. You should read the next part of this article for more on those chart patterns.
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