Failed breakout trades: those that do not deliver
USDJPY price action last week provided us a recent example of a failed breakout so for learning purposes let’s take a look.
Anticipating that big break in USDJPY
I wrote in this story ‘Check higher time frames for significant support resistance levels‘ that USDJPY has tested a key support level many times in the past 5 months. Based on expectation, it was logical to conclude that:
1. Do not expect it to break
2. If it breaks, expect big move
However that secret side of me that wants immediate gratification also looked forward to a break and subsequent big move. Unfortunately USDJPY did not satisfy.
To recap, we observed that USDJPY bears need to overcome a support zone between 101.20 and 101.60.
2 failed excursions below 101.20
On the 4-hourly time frame, this is what successful breakout trades should NOT look like. The bearish candlestick at Point 2 could be interpreted as a successful breakout with full close below support zone but alas it was immediately negated with a following engulfing candle. In fact we can turn around and call this a bear trap aka wash N rinse aka fading the short.
In this next chart, that failed penetration was nothing but the tail of a Doji on 21 May. In fact USDJPY rallied 80 pips from low on the same day.
The right and wrong way to play breakouts in forex trading
Golden rules for forex trading (and any other tradeables)
Buy high sell higherBuy low sell high Sell low buy lowerSell high buy low
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
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