This forex trading system is called the false breakout forex trading strategy and it is important for you to know it because the forex market can be notorious for false breakouts only to take out your stop loss prematurely and then head in the direction of the trade you placed that got stopped out!
False Breakouts Happen And You Need To Identify Them
There are times when the price will break a support and resistance level on your chart and you think that ” oh, this level in broken”.
Then guess what happens next?
It was just a price spike and the price then obeys the support or resistance level.
Now, the false breakout forex trading strategy allows you to trade horizontal support and resistance levels when price makes a breakout only to fail later.
Many traders get stopped out when this false breakout happens and they walk away only to early.
If they stick around and watch the candlesticks, they would have a very good chance of entering for the 2nd time and made huge profits when price goes as expected.
In this post, I will show you how to do that and what to look for.
THE CHART BELOW EXPLAINS THIS CONCEPT OF FALSE BREAKOUT
If you don’t know what a false breakout looks like,the chart below is a good example. Notice that resistance level highlighted in blue. Price came up to it at point 2 and broke past it and seemed to head up only to fail a few candlestick later and head down.
And this next chart below is an example of a false breakout on a major support level:
HOW FALSE BREAKOUTS BECOME TRAPS FOR MANY TRADERS,
If you sold at a the resistance level or if you bought at the support level and a false breakout happened, depending on how far away your stop loss is placed, you most likely will get stopped out.
The false breakouts are like traps for many traders and it would seem as the price spike is just enough to knock out your stop loss and then the market goes in the direction you are hoping for!
Its frustrating, isn’t it?
The problem is, for many traders, once they get stopped out in the first initial trade and once that false breakout happens and they get stopped out, they simply walk away from the setup because they think the setup is not valid anymore.
This is a great mistake.
You need to stick around and watch the price action…watch the candlesticks to see what happens next.
So what you need is to know what kind of breakout chart pattern you to look for when there is a false breakout.
- Now, usually when this false breakout happens, its a very good signal that the market will head in the other direction.
- So if you’ve had your initial breakout trade stopped out, don’t walk away…yet.
- you can trade this false breakout using a false breakout pattern I’m going to show you here.
STEPS TO IDENTIFY THE THE BREAKOUT CHART PATTERNS
For Short Trade Setups (refer to the first chart above):
- First, the market must be in an uptrend which means prices will be making higher highs.
- These higher highs are in fact acting as resistance levels and you need to identify and know them because in the process of price going higher it would usually pullback down and then head up again breaking the nearest higher high to create another new higher high.
- Wait for the breakout to happen. Ideally, the breakout candlestick should close above the resistance level thus making it look like a genuine breakout.
- But the 2nd candlestick after the breakout should be a bearish or very bearish reversal candlestick pattern and it should ideally close near or just below the resistance level it just broke.
For LongTrade Setups (refer to the 2nd chart above):
- First, the market must be in a downtrend which means prices will be making lower lows.
- These lower lows are in fact acting as support levels and you need to identify and know them because in the process of price going lower it would usually rally back up temporarily and then head down again breaking the nearest lower lows to create another new lower low.
- Wait for the breakout to happen. Ideally, the breakout candlestick should close below the support level thus making it look like a genuine breakout.
- But the 2nd candlestick after the breakout should be a bullish or very bullish reversal candlestick pattern and it should ideally close near or just above the resistance level it just broke.
THE TRADING RULES FOR FALSE BREAKOUT TRADE
For Short Trade Setup:
- Place a sell stop pending order 2-3 pips below the low of the bearish candlestick.
- Your stop loss should be 3-5 pips above the high of that bearish candlestick
- Use Previous swing lows as your Take Profit 1, Take Profit 2 levels etc
Trail your stop loss behind lower swing highs and lock in your profits as the trade goes profitable.
For Long Trade Setup:
- Place a buy stop pending order 2-3 pips above the high of the bullish candlestick.
- Your stop loss should be 3-5 pips below the low of that bullish candlestick
- Use Previous swing highs as your Take Profit 1, Take Profit 2 levels etc
Trail stop your stop loss behind higher swing lows and lock in your profits as the trade goes profitable.
ADVANTAGES OF FALSE BREAKOUT FOREX TRADING STRATEGY
- The market trend generated by this false breakout chart pattern tend to go on for a very long time which can allow you to get hundreds of pips in that trend when you are trading in larger time frames like the 4hr and the daily charts.
- Nothing complicated, its just price action trading in action and the rules are fairly simple for even beginner forex traders to understand.
- the risk to reward ratio of the false breakout forex trading strategy is really excellent. Imagine risking say 40 pips for a 240 pips profit? This forex trading strategy is capable of doing that.
DISADVANTAGES OF FALSE BREAKOUT FOREX TRADING STRATEGY
- I guess the difficult part for me sometimes is I will be so focused on watching other chart patterns that when the false breakout chart pattern happens I will not realize it until later and wonder why there was a breakout and then the price moved away from a particular support or resistance level …out of curiosity I will check to see why…only to discover I missed that false breakout trade signal. You really have to be paying close attention to see if these false breakout chart patterns are forming for you to take the trades, otherwise you will miss these false breakout signals.
- As usual, there will be times when the false breakout signal will be actually false…which means you will suffer a loss even though the trading setup was perfect. As an example, there might be a price spike on the 3 candlestick after the breakout which can knock out your stop loss. Or there will be false breakout signal and you will get into a trade and then a few candlesticks later the real breakout happens! Such is the nature of the forex market.
If you are trading support and resistance levels, always anticipate the false breakout. Nothing is always 100% certain in any trading setup.
Don’t walk away in the initial trade when you get stopped out, just hang back and at least watch the the first or the second candlesticks after the breakout. This will be your clue to determining if the level is going to hold or not.
So know your bullish and reversal candlestick chart patterns, its important if you are going to start trading setups like what I’ve shown you in the charts above.
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