The trading strategy a forex trader chooses can be a defining tool for the future positive performance. This material had been designed for beginning forex traders that are searching for an effective trading strategy. What we need to mention from the start is that this strategy, like any other one, should be tested first. Forex trading demo account is a must, especially if you are at the beginning and you need to develop those skills required for you to generate consistent returns.
So, without further a due, let’s jump into the actual strategy that we want to talk about.
False breakout trading strategy
False breakouts happen many times in the forex markets, simply because support and resistance levels are not like a line in the sand. They are actually several layers deep and you will usually find the market breaking a certain support/resistance only to resume impulsively in the opposite direction.
This could be a great opportunity for you, but you need to learn how to do it. First, we must mention that this strategy should only be used for with trend trading. Do not even apply it for counter-trend trading.
Let’s show an actual example, so you could understand the strategy better.
Above you can see the EURUSD chart on the 4h time frame. Since the beginning of 2018, the pair had a good performance, following around 13% gain in 2017.
We’ve drawn on the chart the 1.1941 level, which was a key support level. As you can see, the sellers managed to break it in the first place. Considering that the selling leg down was pretty impulsive, some of the traders might have assumed that the market will continue lower. The exact opposite happened and the price surged impulsively on the upside.
Let us know explain the basic rules of the system:
- First, find the dominant direction of the market (the context)
- Look for a key support/resistance level to which the market had responded in the past
- Wait until that particular level had been broken on the other side of the dominant direction of the market.
- For conservative traders, you can wait until the dominant side resumes and breaks again the level and tests it.
You can place stop loss below/above the false break formation, and target at least 2 or 3 times the stop loss value. This kind of setup had a good accuracy and over time it can be very effective.
As we’ve already mentioned, don’t forget the forex trading on demo account before you actually trade live, with your own money.
Foreign exchange trading carries high risk and may not be suitable for everyone. You should carefully consider before deciding to invest in speculative assets. No information contained in this article should be regarded as a decision to buy a certain asset.