Forex Trading Breakout Strategy (So Simple Yet So Powerful)

What’s up Traders, in this article, we’re going to be talking about Forex Trading Breakout Strategy (So Simple Yet So Powerful).

In the following minutes I will show you a simple but powerful trading strategy that will help you to take advantage of failed breakouts. 

False Breakout Trading Strategy

• How to profit from “fakeouts”
• Only 15%-20% of these Price moves are valid
• For Novice Traders: Breakouts Trading losing Strategy
• Flase Breakouts are easier to detect on the chart

How to profit from “fakeouts”

As you probably know, one of the classic rules of support and resistance is that support, once violated, becomes resistance and conversely, resistance, once violated, becomes support. 

We can find many examples of this principle in real market action. This chart shows a classic example where a resistance level held at point A, was broken at point B, and then held cleanly as support on a retest at point C.

This chart shows another example where previous support was broken, but then held as resistance on the next retests. These are textbook examples of price action around support and resistance levels, but there is one small problem.

Only 15%-20% of these Price moves are valid

Only 15%-20% of these price moves are valid, and the rest ones are simply failed or fake breakouts. A false breakout is when price moves beyond the previously established price range but then retreats back to within the range. 

Since a range is basically a battle between buyers and sellers pushing in opposite directions, these false breakouts often occur because support and resistance are not 100% accurate. 

For Novice Traders: Breakouts Trading losing Strategy

Here’s a harsh truth: for most novice traders, trading breakouts will be a losing strategy. 

The trading reality is that explosive gains are quite rare considering the many potential ranges available to trade, and even if you anticipate the breakout correctly, you will still face problems with maintain the position. 

Flase Breakouts are easier to detect on the chart

But while a range breakout may be difficult to trade profitably for many traders, there are alternatives using the same chart pattern that give the trader a better chance at success.

This is the pattern that we will try to spot on our charts and here’s the logic supporting this strategy. Markets hunt for stop orders and activity beyond significant price levels. 

Many times, there is no real conviction behind these moves, and the price moves fail and reverse quickly once the stop orders are triggered. 

If this breakout occurs and fails, there will be many trapped traders, which can add momentum to the opposite direction from that level. 

Entering Reward/Risk potential with a clearly defined Risk point

• Momentum Divergence
• Stop Loss placement
• Take Profit Targets
• Strategy suited to Swing Trading and Scalping
• No Subjectivity in Stop Location

Entering after such a move allows for excellent reward/risk potential with a clearly defined risk point. 

The best examples of this trade occur in extended ranges, and will usually be accompanied by a momentum divergence on the trading time frame.

In this example, for a short entry, the market trades above a clearly defined resistance area, but immediately reverses on the following bars and closes back under the resistance. 

Momentum Divergence

There can be significant volatility, volume, and activity on the breakout, but there should be no real continuation beyond the level. The final confirmation of the fake breakout is the momentum divergence.

Here’s another example. We have a clear support, the price being unable to continue lower. Point A marks a brief breach below support, but immediately closed back above the support level. 

Once the movement was confirmed by the divergence, the wiser trade would be a long trade, instead of chasing the failed breakout. On the XX chart, we found this pattern once again. 

The price attempted to break to new highs, but there was not enough buying pressure to hold it above the resistance level and it failed on the same day.

The divergence was there, so the higher probability trade would be on the short side. This charts shows another classic example of a fake breakout. 

After the resistance was broken to the upside, the first instinct is to “go long” for a continued trend run above the previous highs, but the market actually closed below the resistance level and reversed. 

Stop Loss placement

When we trade this setup, the stop is clearly defined: just beyond the extreme of fake breakout. Because this is an aggressive countertrend trade, it is important to not add to losing trades or widen the stops. So, respect the stop level without question. 

Take Profit Targets

In what concerns the profit taking, allow yourself to take partial profits as the market makes them available to you.

For instance, one plan would be to take profit on the first part when the profit equals the initial risk on the trade, meaning a 1 to 1 ratio. The profit target on the second portion is discretionary. 

Strategy suited to Swing Trading and Scalping

I prefer to swing trade with this setup but this pattern also suits scalping. You will find many false breakouts on the 1-min charts, you just have to manage your trades accordingly. 

No Subjectivity in Stop Location

The beauty of this failed breakout technique is the fact that there is no subjectivity in stop location and little subjectivity in managing losing trades—if the market makes a new extreme, then you are wrong and must exit the trade. 

Here’s an important observation. Ideally, the market should not be able to consolidate near the level. Consolidation near the level is more consistent with a continuation of the existing trend.

If the failed breakout is successful, price should move sharply away from the level. 

Once you find yourself in a trade where the price doesn’t moves or stagnates for too long around the entry points, cut your losses, exit the trade and search for better trades, with hopefully more momentum behind them. 

Final words

Okay, so that’s it I’ve come to the end of this presentation, I hope you’ve enjoyed it and if you really do please write a comment and click the share buttons smash it right, and click to subscribe bell to Allow notifications be updated.

Whenever, I publish content like, this and finally any questions or feedback let me know below and I’ll do my best to help, so with this guide, I hope you got value out of this presentation, I wish you good luck and good trading and I’ll talk to you soon you.

About Author

Milad Ghanbari

Milad Ghanbari is a trader and also loves writing. He created the MiladFX to help traders. And provides online tools and tutorials needed for traders for free here to support their colleagues in the field and guide them to do more successful trades. Turn on MiladFX notifications to benefit from new free future tutorials.

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