How to recognise valid breakout in forex

 

Price penetrating support/resistance zone does not always signalize breakout. In fact. Fakeouts are more common. Price will often test S/R zone. Sometimes it will test both S and R zones multiple times, leaving most of the traders clueless and out of the trade.

 

Typically. Just as they give up. Price explodes in violent breakout.

 

However you are a not a defenseless  victim. You can actively take steps to increase you chance on breakout trade tremendously.

 

Watch the price approach S/R zone.

Price should approach the S/R zone on growing volume and strong momentum candle. Wick facing the S/R zone should be narrow. Price approaching the S/R zone in hesitant, shy manner is more typical for fakeout.

 

Breakout candle

It possible to enter the breakout immediately as the price surpasses the S/R zone (NEWS and breakout MT4 EA). for the most of the trading approaches it is more suitable to wait for candle closing beyond the tunnel. To time the entry correctly we switch to 5 to 15 minutes timeframe. Candle closing beyond the tunnel should be clearly bullish (buy), or clearly bearish (sell). Wick in the direction of breakout should be narrow. On the other hand if it is taller than the candle body, fakeout might be in progress. Avoid entry or wait.

 

Watch volumes.

 

 

Activity on breakout candle must be increased, compared to previous candle. This signalizes interest of major players that will make the valid breakout possible. Low volume breakout should be avoided as it can be easily turned into fakeout.

 

Prefer breakout in the direction of trend

 

In all breakout trading models we have created. Breakouts are more profitable in the direction of trend. It is extremely difficult to enter the breakout at the trend end (into a new trend). Those areas are typically to choppy to be effective.

 

Look for confluences

 

S/R you have found might match sometimes the historically important support/ resistance. You will be often able to find out this confluence by switching to higher timeframes.Those zones can provide great entry points with incredible risk reward ratio. Exploit them by adding to the winning trade on the breakout.

 

It should be quick

True breakouts will happen fast. If the price lazily moves around breakout zone. It is most likely a failure (fakeout). Abandon trade.Wait for a better trading opportunity.

 

Conclusion: No matter what you do. Some breakout trades will fail. You goal should be to increase your winning chances by being able to filter out some of those failures, before you enter. Combine all those slight edges and you get viable trading system, applicable on any forex instrument with great result.

 

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