Fade the Breakout
2 min read
Trading breakouts from key levels is amid high levels of risk, while due to that it’s a more common case for a trader to witness a failed breakout rather than an actual one. Also, as the market will usually attempt to test a key resistance or support level more than once before a breakout occurs, many traders have devised counter trend approaches (looking for an opportunity to fade breakouts). However, fading any breakout may cause huge losses, because as soon because the actual breakout occurs, a resilient and lasting trend begins.
Fading requires a trader to look at consolidation setups so as to detect an appropriate entry (into a trade), which features a higher potential to become a failed breakout. In this case a trader will usually rely on daily charts to detect trading ranges and on 1-hour or 4-hour charts to position himself/herself.
There are certain steps, that are to be followed, in order to implement the “fading strategy”.
When going long:
- a trader will look for a currency pair, having a 14-period Average Directional Index (ADX) but 35, or an ADX
- currently during a downtrend (which implies further weakness);
- the trader will got to await a price move of a minimum of 15 pips below the low of the prior trading day;
- the trader will place an order to shop for 15 pips above the high of the prior trading day;
- once the order is filled, he/she will place a protective stop at a distance of 30 pips below the entry price;
- the trader will take profit as soon because the market moves to the upside by a minimum of 60 pips (or twice his/her risk exposure).
When going short:
- a trader will look for a currency pair, having a 14-period Average Directional Index (ADX) but 35, or an ADX
- currently during a downtrend (which implies further weakness);
- the trader will got to await a price move of a minimum of 15 pips above the high of the prior trading day;
- he/she will place an order to sell 15 pips below the low of the prior trading day;
- once the order is filled, he/she will place a protective stop at a distance of 30 pips above the entry price;
- the trader will take profit as soon because the market moves to the downside by a minimum of 60 pips.
