False Breakout Strategy

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painofhell

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Introduction

The forex market is a constant battle between bulls and bears. There is wise saying that “Bulls make money, bears makes money but pigs are slaughtered”. If we do not implement strategic trading considering all the risks, having proper money management and mastering own psychology then the result will be obvious. I often note that in ranging market, one particular strategy always works. It is called “False breakout strategy”. In this article, I will illustrate how I used this strategy. False breakout strategy is based on the major support and resistance levels.

Time Frame and Currency Pair

The false breakout strategy can be implemented in any time frame and any pairs, but for this example, I took 4 hours candlestick chart on USD/SEK currency pairs. This means that each candle on the chart represents 4 H of price movement.

Strategy Concept

In ranging market, the price often reverse after an attempt of false breakout around the resistance or the support levels. This happens because of the buyers and sellers are in hesitant state of mind at tricky levels. (Figure 1 equilibrium condition).

Figure 1. In ranging market, equilibrium condition prevails in certain range.


Long Trade Setup The major steps to execute the false breakout strategy for long trade:
* Draw the support level where the price bounces back at least twice. In this example it is 9.0426 (chart example is taken from one of my Dukascopy demo trading chart)
* Observe any false breakout candle that that goes below the support level (See Figure 1)

Figure 1. Support Level

* Wait the next candle whether it is bull or bear candle. If it is bull candle above the support then enter the trade
* Set a stop loss of at least ½ ratio with the target profit below the low price of the false breakout candle.
* Set profit targets for this trade at a risk to reward ratio of at least 1:2 (See Figure 2)

Figure 2. Trade entry

Conclusion

The trading strategy is only one of the essential 4 elements of trading. Unless you are mastering in all four it is doubtful to have constantly profitable trading. The strategy gives cutting edge but trading psychology, fundamental analysis and risk and money management is other areas one should be mastering in any trades.
 
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Nosero

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The greed, emotions, and analysis come into business when there occurs a false breakout. You can never make a decision on the base of a single candlestick. You have to give time to the market before making a decision of buying or selling. Stay blessed!
 

john.brave

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Thanks, I agree with the opinion above. But why should profits I have yet balanced until now?
 

robert.miner

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I think, trading strategy very important to support the success of someone in the forex.
 

Hakone

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Painofhell, thank you for article. You have just explained one simple strategy how price movements can be utilized to traders benefit. I would just note that it is based on simple market psychology which will drive market to test support or resistance level several time,before it is finally breached
 

Viaso

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I always advise traders to stay with the long trend while trading and never look much upon the breakouts. Most of the breakouts are false which can ruin your analysis. So, you need to trade with the trend with a belief of the elongation of the trend. Am I right folks?
 

BlazeUp

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I also think that most of the breakouts are false market moves which occurs due to market sentiment. Indeed, it is always better to stick with your technical analysis, as prices will inevitably move with the trend
 
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