reasons (technicals or market sentiment) to convince me to do so. While most
people are more afraid of losing out on a potentially great opportunity than losing
their money in a bad trade, I prefer to let the price breakout play out the scene first
before deciding on the next move. One way of doing that is to check if the currency
price will close beyond the breakout level on the hourly chart.
Focus on an hourly time frame that displays the price actions either in the candlestick
or bar format. Language-wise, I will refer to either the candlestick or bar as the
candle. If the candle closes beyond the breakout level on the hourly chart, you may
then place a short order at least 10 pips below that candle’s low for a downside
breakout. The opposite is true for an upside breakout – you may open a long position
when any subsequent candle exceeds more than 10 pips above that candle’s high.
This filtering technique only works if there is still more room left for
the currency pair to move before it reaches its average daily range.
If the price does go back to the breakout level, you will need to monitor the price
action even more attentively as its behaviour around that level could provide you
with important clues as to the next price movement. A false breakout is almost
certain if the price moves back into the pre-breakout range, but if it is repelled by
the breakout level, and does not penetrate past it, there is a higher chance of the
price moving in the direction of the breakout.
Remember that the success of a breakout relies on the second and subsequent
waves of traders joining in the breakout, sustaining the breakout like a selffulfilling
prophecy. Let’s say in a downside breakout, the price soon returns to the
breakout level after penetrating the support. For the breakout not to fail there must
be more selling interest from a second wave of traders who see that it is a good
opportunity to short at that breakout level in order to overcome the opposing buying
interest. This second wave of traders are selling in anticipation of lower currency
prices after seeing the bearish technical picture, thus pushing down the currency
price from the breakout level of support. The reverse applies to an upside breakout.
If you see that prices are bouncing off that breakout point on the rebound trip, you
could place your breakout trade with a limit or market entry order, with a stop placed
at least 20 pips on the other side of the breakout level or outside of the day’s price
range, depending on your risk tolerance. Once the price movement picks up speed in
the direction of the original breakout, and breaks below the low (high) of the
downside (upside) breakout candle, there is a high probability of the breakout being
successful since this new low (high) is another confirmation of a successful breakout.
This way of filtering a fleeting short-lived breakout offers some protection against
losses even though like all trading tactics it is not completely fail-proof.
Source: 7 Winning Strategies for Trading Forex: Real and Actionable Techniques for Profiting from the Currency Markets
