News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
EUR/USD
Mixed
Oil - US Crude
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Wall Street
Bearish
Gold
Mixed
GBP/USD
Mixed
USD/JPY
Mixed
More View more
Real Time News
  • *Reminder: Weekly Strategy Webinar tomorrow morning at 8:30am ET on DailyFX! https://t.co/lxd5fZnn4H
  • Central banks often deem it necessary to intervene in the foreign exchange market to protect the value of their national currency. Learn how central bank intervention can impact your trading here: https://t.co/ZJOEtpGUIq https://t.co/tJWOXZCoBw
  • The US Dollar may seesaw as investors navigate what could be a volatile week packed with US GDP data, rising Covid-19 cases, Q3 corporate earnings and more. Get your #currencies update from @ZabelinDimitri here: https://t.co/UNRcd3c9uA https://t.co/BiUiOV4cXC
  • USD/MXN pushes lower towards a critical support level in the midst of continued political uncertainty. Get your #currencies update from @HathornSabin here: https://t.co/HEAzgJJJjg https://t.co/NU9wYbIuni
  • Gold Forecast - via @DailyFX “Gold price outlook still hinges on stimulus deal expectations and corresponding swings in real yields.” What will I have my eyes on in the week ahead? Link to Analysis: https://www.dailyfx.com/forex/fundamental/forecast/weekly/title/2020/10/23/gold-forecast-xau-usd-at-the-mercy-of-a-fiscal-stimulus-deal.html $GC_F $XAUUSD $GLD https://t.co/GWEI4d4mMu
  • Forex liquidity makes it easy for traders to sell and buy currencies without delay, and also creates tight spreads for favorable quotes. Low costs and large scope to various markets make it the most frequently traded market in the world. Learn more here: https://t.co/5uSWKoLkd6 https://t.co/rxswe1gVL0
  • Talks between the EU and UK restarted today and will continue over the weekend as negotiators from both sides battle against the clock. Get your #currencies update from @nickcawley1 here: https://t.co/ER8IT1yxYO https://t.co/Jeeu2P9mwB
  • The London trading session accounts for around 35% of total average forex turnover*, the largest amount relative to its peers. The London forex session overlaps with the New York session. Learn about trading the London forex session here: https://t.co/UTWxbnNz7M https://t.co/W9awqb818J
  • There is a great debate about which type of analysis is better for a trader. Is it better to be a fundamental trader or a technical trader? Find out here: https://t.co/aVAzFypAg1 https://t.co/lucvsACxu5
  • There are three major forex trading sessions which comprise the 24-hour market: the London session, the US session and the Asian session. Learn about the characteristics of each session here: https://t.co/UVvf51HiVP https://t.co/yywnE39MLU
Guest Commentary: How to Trade False Breakouts

Guest Commentary: How to Trade False Breakouts

2012-06-01 04:00:00
Yohay Elam, Forex Crunch,
Share:

Among the different types of technical traders, we can find two large groups: range traders and those stalking the breakouts. There is also a mix of both approaches.

In some cases, a breakout can prove to be a “fakeout” that provides a significant trading opportunity in the opposite direction. Here’s how it works, with a recent example on EUR/USD.

Range vs. Breakout

After a pair is capped or supported by a certain technical level and gets close to this level, range traders will try going for the opposite direction: buying the pair when it gets close to support or selling it when it gets close to resistance. A break out under support or above resistance will trigger breakout traders to ride on a sharp outwards move: sell the pair when it breaks support or buy it when it breaks resistance.

However, there are many cases of false breakouts. A pair dips below support but doesn’t go too far, or lifts its head above resistance without following through. Only a second attempt is the “real breakout” that breakout traders are waiting for.

The Big Rebound

Yet there are cases where the false breakout is immediately followed by a very strong rebound. One explanation for this move comes from the world of options: certain market participants have an interest in pushing the price to certain levels, triggering options such as barrier options, Double No Touch options and others. Other market participants want to avoid the same levels. These battles created interesting price action.

These moves aren’t backed by fundamentals and don’t represent any short term or long term trends – just interests by certain participants.

So, in such cases, some participants push the pair to a certain level, and after they won the battle, they let go. The result is that the fakeout is followed by a violent retracement.

Fakeout Example

Such a move happened on Friday, May 25th with EURUSD. The pair slid towards the psychologically important level of 1.25. It suddenly dropped below this line and reached 1.2495. The pair was under 1.25 for only very few seconds. It then rose back up and climbed as high as 1.2547 in a gradual move.

Guest_Commentary_How_to_Trade_False_Breakouts_body_EUR_USD_Fakeout_May_25_2012.png, Guest Commentary: How to Trade False Breakouts

EUR USD Fakeout - Click image to enlarge

So, the fakeout turned out to be a jumping board for a rebound – the move down was quick, but the rebound took more time.

So how can we trade this false breakout?

  1. Placing an order: One option is to place an order for the opposite direction just under the line in question and to go for the opposite direction. This is some kind of “extended range trading”.
  2. Stalking: Another option is to stalk this breakout, but instead of trading in the direction of the breakout, go for the range trading direction after seeing that the pair isn’t really breaking.

What do you think? Do you trade false breakouts?

Further reading: 5 Most Predictable Currency Pairs – Q2 2012

By Yohay Elam, Forex Crunch

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES