Trading Breakouts: Real or False?

 

Hello Traders!

In last week’s article “Simple Forex Trading: Impulsive Moves” we spoke about trading impulsive moves in the Forex market. We concluded that the best Forex tip and advice I can give to traders is this: focus on trading impulsive moves. Why?

Impulses provide the following:

–          great reward to risk;

–          high probability trade setups;

–          great trading strategies;

–          and above all: the trades develop and materialize quickly.

The advantages of a trade developing quickly are numerous, but especially the following aspects are a great bonus:

a)      This gives traders a well deserved mental break of being worried that their trade might turn into a loss;

b)      Plus a trader’s trading capital is freed up sooner because the trade has either reached the target quickly, or the trade is at break even.

The “problem” is that impulses only occur once in a while. Most statistics show that currencies are exactly correcting themselves 3 out of the 4 times.

Basically we can summarize it as follows:

  • The currency starts to correct itself for a while;
  • The correction continues longer and makes a consolidation pattern of some sort;
  • The currency breaks out of this consolidation for an impulsive move, continues for a while;
  • But then goes back into a state of correction;
  • Etc.

Catching an impulse and avoiding a correction is not an easy task. But by being aware of the typical market behavior, a trader is warned of the potential dangers when trading an ongoing impulse, or when trading a correction.

Luckily, traders who use technical analysis for their trading have a large arsenal  of technical analysis tools to their disposal which will aid a trader in deciding whether a trade is sufficiently setup for a break out, or not. I will share some of these tools with you here. Of course some of these tips and tricks will remain a Forex trading secret, and only Winners Edge mentored students will gain gull access to all of the Forex advice and Forex predictions. If you are interested in joining this great program then take a look at this info at Forex mentoring.

Determine trend

This is a simple yet important rule. Consolidations are very interesting. It is a difficult phenomena to fully understand all the ins and outs but basically:

–          They are complex;

–          They occur on all time frames;

–          They have different shapes;

–          They have different lengths.

But when they do occur, the break out is either going to be with the trend or counter trend. By focusing your Forex trading methods on trend continuation break outs will boost the trading result.

Why?

Any movement out of a consolidation zone that is counter trend could turn out to be a false spike, which is then followed by a trend continuation.

In the example of the chart, we are able to see the following:

a)       the best opportunities are those where the breakout is in line with the trend;

b)      in the recent down trend there were many counter trend break outs to the upside;

c)       these “false” break outs out of the consolidation zones turned out to be spikes, which were then quickly followed by a continuation move with the trend.

Simply put, keeping the Forex trading strategy simple and only trading with the trend still remains the best Forex advice out there.

Exceptions?

Yes. If the break out is counter trend on a certain time frame, but with the trend on a higher time frame, a trader might want to consider their options for taking the trade.

MAR 8 EURUSD 4HR

Bollinger bands

A great yet simple method is using an indicator called Bollinger bands. If you would like to get more information on Bollinger Bands (BB), then read these interesting articles on BB:

1)       “Bollinger Bands Work For Me”: general information on how do Bollinger Bands work;

2)       or if a trader is looking for a Forex strategy on how trade using Bollinger Banks, then this article on “More Information About The Bollinger Band Strategy” is a great one as well.

When price is hitting the BB when breaking out of  the consolidation zones, we are able to see that there is great difficulty for the currency to keep moving in the direction of the break out for a sustainable run.

There are a few exceptions when the momentum and strength are powerful enough to create a sustainable break, but in general it does give a great indication.

MAR 8 EURUSD 4HR 2

Chart patterns

Of course logically speaking, chart patterns are a great method of getting an indication to which direction the breakout will occur. Flags, triangles, wedges, head and shoulders, double and triple tops and bottoms, etc are all great indications which way the currency will continue. Read here in this article “simple Forex trading: impulsive moves” more about corrections and impulses.

In this chart we are able to identify a few of those patterns.

MAR 8 EURUSD 4HR 3

Length of consolidation zone

There are several important conclusions regarding the length of consolidation zones which are note worthy.

1)      Smaller consolidation zones which are relatively short, can spell quick continuations as well: a small almost quiet looking pause which hardly gives any kind of retracement usually indicates that the opposite side of the market has no power at all to change or divert the trend and a continuation when the currency breaks out is likely;

2)      The bigger the consolidation zone becomes, the more violent the break out can become: if however a consolidation zone drags on for a longer while, then the power of the breakout increases. Usually the longer the consolidation zone, the bigger the size of the break out afterwards. It is similar to having tension built up inside the consolidation zone, and the break out does occur, the tension and energy is released and the break out has more power.

In our live trading and analysis room I use these concepts, and more, to identify the likelihood of continuation break outs. Take a look at yesterday’s analysis right here. 

Thanks!

Thank you for taking time to read this article. I hope that it will benefit you in your trading.

Thanks as well for sharing this with your friends and other traders!

Our twitter account is: @winnersedgetrad.

Good Trading – be careful with trading today on this day of a NFP announcement.

And last but not least, I wish you a great weekend!!

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