Dealing With False Breakouts

Breakouts are a great way of getting into Forex trends but most breakouts tend to be false ones and soon come back below the breakout point and stop traders out who have taken a bullish or bearish breakout. One way to avoid this is to look at momentum indicators and not take the breakout if the indicators are at an overbought or oversold extreme, as there will not be sufficient momentum to help prices move through and away from resistance or support but perhaps the best way is to use a time stop.

When most big breaks occur, stops are hit and fresh buying comes into support the break and the price of the currency runs away from the breakout point quickly but how many times have you seen a breakout stall just above or below the broken level and hold just above it or fall back beneath it? Loads of times and when this happens, prices then tend to come back further until your trading signal is stopped out. The way to prevent this is to use a stop which is in the market, at x level and comes out the market, after x amount of time if a minimum target or stop level is not hit.

If the trade has failed to move quickly, in the direction you thought it would, you would liquidate your trading signal and exit the market, if the trade is at a profit but not at target or above your stop level. A time stop can be a few hours but no longer than a day and if you don't see the minimum profit you were expecting your out out of the market. This can limit losses, while other traders simply sit and hope the breakout gains momentum and get stopped out for a bigger loss. A time stop is one of the most effective tools you can use in your Forex trading strategy and if you use it, you will see how effective it is.

The Key Level Suck

You very often see a market rising to a key number which is very often a round number like 1.000, 1.60, 1.20 etc and you see these as key levels on a chart. Lets say the trend is up and everyone is expecting this number to be tested – forget about market timing and jump in the market and hold for the test. The number more often than not will be tested (if it's a key number) so get in and you will notice the market will suck the number up to the level. Just get out before the level is tested. When the news and other traders are waiting for a level to be tested and looking for it to hold – it will generally be tested. Most traders will want to come short into resistance, rather than join the trend up to the level but you can do this and make a quick profit.

The Unexpected Trade

If prices approach a key level which is expected to hold and it breaks and your charts look wrong and the majority of traders also think the trade is wrong – take the trade. The more people who disagree with a trade and the more wrong it looks on your currency charts the more likely it is to be right. The majority of traders are losing money trading currencies and these trades hit all the novices and those who think the price can be doing what its doing but if you take the view it is and everyone is trading the opposite way, you can see why these trends are so profitable.

Non Farm Payroll Trade

Trading over non farm payroll is the equivalent of flipping a coin – the number cannot be traded on its realize and most traders do this and hope to make a quick profit but get spiked out by volatility. If you want to trade non farm payroll forget about trading its realize and wait until 2 hours after the number has come out to see, what the tone of the market is like after the initial flurry of activity or even better, wait until the close of the market. Traders like to trade this number for fun and excitement to get a quick profit but it very rarely works out this way so avoid this gambling trade and wait till later in the day.

Don't Abandon a Pair You have Just Lost On.

Many traders are put off trading a currency pair after they have just taken a loss in it and move on to another trade opportunity but this is a mistake in my view and sometimes I would take 2 or 3 losses on a trade before it comes my way and this happens a lot when trying to catch a turning point at overbought or oversold levels. If you are trading changes in momentum you will very often get a few flase signals before the trade breaks your way and my view is – if your trading logic is right and the profit potential is good and can cover a few losses try again and don't worry about losing the previous trade.

Final Words

The above are just a few trading traps which catch out novice and in experienced traders but losses can be minimized in all the above trading set ups and in most instances these trading traps, can offer great opportunities for profit with your trading strategy. There are many more and we will cover them in part 2 of this article series.