A guest post by Ahmad Hassam
Breakout trading can be highly profitable yet at the same time frustrating as many breakouts have a tendency to fail. The main cause behind most of these false breakouts in the forex market is the big players that intentionally cause pairs to breakout in order to suck in non suspecting or inexperienced players.
Breakout trading is all about learning how to avoid trading a false breakout. You need to develop a price filter that can help you screen a false breakout from a true breakout so that you can trade it.
This false breakout filtering forex strategy have been specifically developed to take advantage of strong trends in the market that make higher highs, all of a sudden make a low, fail then reverse and make new highs.
Now, this type of a trade setup usually tends to have a very high success rate as most of the weak players in the market get flushed out by the false breakout leaving only the strong players. These strong real money players quickly reenter the market and push it further higher.
This is how you are going to play this strategy. Look for a currency pair making a 20 day high. Look for this pair to make a 2 day low in the next three days. Now, if this pair trades above the 20 day high in the next 3 days after making the 2 day low, go long by placing the stop loss a few pips below the 2 day low that you had identified earlier. Protect profits by using a trailing stop.
Similarly, in case you find a currency pair making a 20 day low, look for it to reverse and make a 2 day high in the next three days. Enter into a short trade if you find this pair trading below the 20 day low in the next three days after making the 2 day high. Place the stop loss a few pips above the 2 day high that you have previously identified. Protect your profits by using a trailing stop.