Trading strategy

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You see, false-breaks happen all the time in the markets; they are a result of the ‘herd mentality’ that causes people to buy the top of a move or sell the bottom. As price action traders, we are in a unique position to take advantage of false-breaks and of the weak ‘herd mentality’ that so many amateur traders possess.

I hope there are light bulbs going off in your head now

exactly

I thought you’d never ask! Joking, I know you are probably thinking that right now, so here you go…

A false-break can be defined as a ‘deception’ by the market; a test of a level that results in a break of that level but the market then retracts and does not sustain itself above or below that level. In other words, the market does not close outside of the level being tested; rather it leaves behind a false-break of it. These false-breaks are huge pieces of evidence for impending market direction, and we need to learn to use them to our advantage instead of becoming their victim.

Here is a visual example of a false-break of a key market level:

Essentially, a false-break can be thought of as a contrarian move that ‘sucks’ the over-committed side of the market out. The concept is to wait for the price movement to clearly show that a market has committed to one side of a trade and that they would be ‘forced’ to liquidate their position(s) on a strong reversal in the other direction. Typically, we see these scenarios unfold as a trending market becomes extended and all the amateurs jump in right before the counter-trend retrace, or at key support and resistance levels or at consolidation breakout scenarios.

We really have to use logic and counter-intuitive or ‘contrarian’ thinking to profit off of the weak-minded herd mentality that dominates most traders’ minds. This is why it’s very important to remain disciplined in the area of trading false-breaks, rejections and failures, and why I love trading them so much.

Types of False Breaks

1. Classic Bull and Bear traps at key market levels

A bull or bar trap is typically a 1 to 4 bar pattern that is defined by a false-break of a key market level. These false-breaks occur after large directional moves and as a market approaches a key level. Most traders tend to think a level will break just because a market has approached it aggressively, they then buy or sell the breakout and then many times the market will ‘fake them out’ and form a bull or bear trap.

A bull trap forms after a move higher, the amateurs who were on the sidelines watching a recent strong move unfold cannot take the temptation anymore, and they jump in just above or at a key resistance level since they feel confident the market now has the momentum to break above it. The market then breaks slightly above the level and fills all breakout orders, and then falls lower as the big boys come in and push the market lower, leaving the amateurs ‘trapped’ in a losing long position.

2. False-break of consolidation

False breaks of consolidation or trading ranges are very common. It’s easy to fall into the trap of thinking a trading range is going to breakout, only to see it reverse back into the body of the range. The best way to avoid this trap is to simply wait until there is a clear close outside of the trading range on the daily chart, and then you can begin to look for price action trading signals in the direction of the breakout.

3. Fakey’s (inside bar false-breaks)

Here’s an image of two Fakey setups, note that one has a pin bar as the false-break and other does not, these are just two of the variations of the Fakey setup:

False-breaks can create long-term trend changes

We need to pay attention to the ‘tails’ of candles that occur at or near key levels in the market. Ask yourself how prices reacted during each daily session…where did they close? The close is the most important level of the day, and often if a market fails to close beyond a key market level, it can signal a significant false-break. Often, prices will probe a level or attempt to break out, but by the close of the daily bar price has rejected that level and ‘tailed out’, showing a false-break or false-test of the level. A failure of the market to close beyond a key market level can lead to a large retracement or a change of trend. Thus, the close of a price bar is the most important level to watch, and the daily chart close is what I consider to be the most important.

Here’s an example of a false-break in the EURUSD daily chart that led to a top in the market and started a long-term downtrend:

History Teaches Us A Lesson

Final word on false-breaks…

As traders, if we don’t learn to anticipate and identify deceptions or ‘false-breaks’ in the market, we will lose money to traders who do. If we pay attention to the price action at key levels on the daily chart time frame, the ‘writing’ is usually on the wall in regards to false-breaks.

Source: http://www.learntotradethemarket.com/forex-trading-strategies/trading-false-break-strategy-forex-trading




Forex Trading Strategies

A good winning trader is defined by the portfolio of forex strategies known and applied in different situations, considering that a single system is not enough to supply the right number of successful trades if you apply it all the time. Knowing how to apply and adapt to all the market conditions is a key factor and this requires a lot of study and strong economics understatement, so is not just about the strategy you use, it's a lot about education also.

In order to come forward to your educational needs, our team has collected numerous resources on trading, ranging from basic ones that involve key principles of indicators and trend lines, to more complex and well developed that use certain advanced indicators like Aiken combined with fundamental factors.

Our collection is available to all users who want to develop their skills and know-how, knowing that on the long run the difference is made by ambition and education. All the information posted is for educational purpose only, and every strategy can be interpreted in a different way by each trader, concepts like money management and risk must be evaluated at every step. Also, our analysts usually test a new forex strategy for 6-8 months on demonstration environment before entering live trades, we advise you to do the same.

To make our library more accessible depending on the level of knowledge we have sorted our forex trading strategies in categories:

Source: http://investazor.com/forex-strategies/



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