How to Trade False Breakouts






“Look left!!!” That is one of the most powerful advice you could get as a trader. Unless you’d learn to “look left” it would be hard for you to survive in trading. So, what does it mean to look left? It basically means looking at what price did in the past, so that you could predict what price will do in the future. Why? People take long to forget historical events, especially when it adversely affected them, or their trading accounts, for that matter. Taking a loss leaves a scar to most people, and people tend to remember what price caused them to lose the trade, or at least they could point it out in the chart. For this reason, history would tend to repeat itself. They’d see price nearing a previous turning point and many traders would then come to believe that price is about to turn.
What do we get when we look left? Supports and Resistances, specifically Horizontal Supports and Resistances. These are areas wherein price would often bounce off and reverse. In a way, you could say that prices bounce off these levels, just like as a ball would bounce off the floor when you dribble it, or bounce off a ceiling if you throw it upwards.
If these levels are broken through, it would be called a Breakout. This means that price strongly penetrated the Support and Resistance areas and even closed below it. Many traders exclusively trade breakouts and nothing else, since often it indicates that price would continue the direction it was heading.
However, even though breakouts are very profitable trading strategies, Supports and Resistances are pretty tough to breakout of. Often, price does bounce off these levels, and that would be called a False Breakout. I call them Fake-Outs. And trading Fake-Outs are very profitable as well.
So, how would we identify a horizontal support or resistance. We could identify it by connecting two lows forming a support line.



Trading Supports and Resistances is much like being a hunter waiting for his prey to come right to the center of his crosshairs. You shouldn’t go chasing around price, but instead just wait for it to come to you. You would need patience, tons of it, if you’d like to be successful trading these setups.

The Entry

So how do we trade False Breakouts? Well, for one we would need to learn to identify false breakouts on the onset as it starts to unfold. To do this, we would be looking for price to touch our Support or Resistance lines, and wait what it does when it touches it. What we are looking for with Fake-Outs is that price would touch it, even penetrate it, then move back in the line after touching it. This would create a candle with long wicks, signifying that price at that level is being rejected.


The Stop Loss

The Stop-Loss should be a few pips below the signal candle for a bullish setup, or a few pips above the signal candle for a bearish setup.


The Take Profits

There are couple of ways to set your Take Profits on this kind of setup. One, you could set your Take Profits right before the fractal. The idea here is that highs or lows are prerequisites to forming a Support or Resistance, thus you wouldn’t want your Take Profit to go beyond that in the event that price does form a Support or Resistance on those areas.


With this trade you could have easily hit your Take Profit. However, on hindsight, you might prefer to have let your trade stay for a while given that price still continued its climb up.
Another approach would be to base it on the size of your Stop Loss. What some would do is set a 1:1 Take Profit versus Stop-Loss. Others would do 2:1, or 3:1. The idea here is to ensure that your Risk-Reward Ratio is positive to ensure that in the long run, even if your Win Ratio is just around 50%, you would still come up with a winning trade account.
What I would do though if using this type of approach, would be to have multiple take profits. The first would be 1:1, and the second would be 2:1. This would ensure that I am on break-even as soon as price hits my first target.

On the same opportunity as the previous one, you would see in this chart that by having multiple Take Profits using Risk Reward Ratio, you would have squeezed a bit more profits from the market. You could have even had a third Take Profit for this setup.

Conclusion

Learning to “look left” and identify Supports and Resistances is a must have for all forex traders. It is a basic tool which must be included in your arsenal of techniques and strategies. And trading Fake Breakouts is one of the best ways you can earn money out of these Supports and Resistances.






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