Forex breakouts are one of the most known and respected signals. When price moves in tight range (congestion) it will sooner or later explode up or down.
Cunning forex trader should be ready to exploit those trading opportunities as they often offer one of the best entry points that could be found on the forex market.
However, trading breakouts can be tricky. Market makers are aware of popularity of breakouts. If you can see them, it is likely that others traders can notice them as well. At this point market makers will often pull out interesting move. Fakeout.
Mechanics of fakout in forex
Traders are lured into wrong entry. Stop losses above/under congestion are liquidated. It can also mean that huge trade blocks are placed at price level that fakeout reached, that made it impossible for price to move on. Fakeout on forex will destroy plans of traders who are not properly prepared.
Good news is,that you can also use fakeouts for your benefit. Some say that they are one of the best entry points that can be found on the market.
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Fakeout forex strategy rules.
Find congestion on the market – price moves in tight range, candles are standing next to each other.
Draw a tunnel. Supports and resistance levels are more like zones, therefore draw them as such. To have better idea about tunnel, you can also switch to line chart.
Wait for fakeout. Fakeout - sudden move outside of tunnel. Price almost immediately returns to the tunnel and closes there. Therefore, wick of the candle (on the breakout side) is very high compared to narrow body of a candle.
We enter immediately after fakeout candle closes, to the direction opposing fakeout.
Place stop loss at peak of the fakeout.
Take profit: Width of the tunnel + distance between entry and support /resistance opposing fakeout.