The one (simple) secret to trade breakout trades

false-breakout

Hey trader, hope everything is going great!

What do you think about the markets this week, after the NFP and the ECB interest rate announcement last week?

I want you to tell me something, is it just me or you also think the NFP report should not be considered as an important announcement anymore?

I just don’t see the market reacting to the NFP report as it used to…

Now, this week comes what I believe is the NEW MOST IMPORTANT FUNDAMENTAL ANNOUNCEMENT: FOMC Meeting Minutes.

This ons has proved in the last year to be the fundamental release that most impacts the market.

Do you agree with me?

Ok, now on to breakouts!

Breakout Trades

I know there are traders that wouldn’t trade breakout trades, they are just to afraid of being caught in a false breakout.

A false breakout appears when the market breaks through an important S&R level and after a few candles it comes back to trade inside the range.

It’s not a very pleasant experience to see that happen, sometimes just a few seconds after you opened your trade.

Now, in order to decipher where false breakouts could occur you need to understand their nature.

When there is a fierce battle between buyers and sellers, the market tends to consolidate (forming what we call ranges).

Sometimes buyers or sellers are willing to take the market below or above respectively an important level to “see” how many traders there are and the strength of the other group.

Now, there are two possible outcomes:

  • If the there are plenty of traders with strength, they will pull the market back inside the range, and a false breakout occurs.
  • If there are no a lot of traders or not with enough strength, the market will continue in the direction of the breakout, and that’s a valid breakout.

So, the key question that you need to answer here is: when do we get a fierce battle between buyers and sellers? This way we’ll know when to avoid trading breakouts.

I’m going to help you answer that…

When ever the market trades near an important Long Term level, there will always be a fierce battle between buyers and sellers to determine which group will win.

So when ever you see the market trading near a LT level, avoid taking breakouts.

Clear enough?

Your Turn

Do you trade breakout trades?

How do you avoid false breakouts?

Share your thoughts

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Raul Lopez

I've been trading the markets for more than 15 years. I believe the best way to trade is by adapting to the market conditions. You can learn it too, join our community .

  • Krishan Lal

    As far as NFP is concerned if it is up with the line and more than expected jpy crosses will rally and that is the truth but if you don’t get to know the base of the report which is “participation rate” then you should not trade that report at all because if lot of part timers are getting employment then that report should not be consider as great.
    But as far as FOMC is concerned the revised GDP report or rate hike and long term planning is reported USD crosses rallies and that is what Fed is doing in line with market expectations and the big reason behind USD biggest rally in a decade.

    back to you
    thanks

    • Raul Lopez

      Hello Krishan,

      Thanks you for your feedback, I dont worry too much about those fundamentals anymore… I just hold my trades if I have enough room, otherwise I just close them…

  • Waqas Khan

    very helpful

    • Raul Lopez

      Glad it was Waqas!

      Have a great weekend!

  • Budi

    Hi Raul,

    If because of some reasons we choose to use a broker that doesn’t have some cross pairs, yes we still can trade the cross pairs by creating synthetic pairs.

    What I want to know is how can we set stop loss and take profit target on a synthetic pair? Whether is there a way to do that or we have to watch the trade all the time?

    Thanks..

    • Raul Lopez

      Test successful…

  • Eric Aroh

    NFP : I did not trade it last week. I normally look at the 5-mins charts, after 15 mins of announcement, and trade in the direction of the impact of the announcement – for 1 hour. I used to pair the prevailing currency (USD) with the weakest available using a sort of currency weakness-strength meter. But I do not trade the news anymore – I even missed out on the immediate impact of the rate increase in GDP – but subsequently am trading the GDP with pairs with the widest interest rates differential – keeping in mind the LT trend, and following the trend until a new announcement affects this strategy.

    Breakouts : I thread gently on this. My approach is to wait until there is clear 20pips away from the S&R. Sometimes I miss most of the pips due to the momentum – but I choose large pip ranged pairs (+/-100 to 120 pips), and be content with catching maybe 30-40 pips. Risky? Yes! Mini lot sizes!!

    Glad to get comments.

    • Raul Lopez

      Hey Eric,

      I’m glad you dont trade the news announcements any more, it stopped being a reliable strategy…

      And I like your strategy to trade breakouts, sometimes its better to miss a few pips to make sure the market will continue in the intended direction.

      Goos luck!

  • Mustaffa

    Hi Raul, I took the CAD CHF breakout trade you posted last week., After it went about 40 pips into profit it turned back down to the original levels so i closed it at BE. Would you mind sharing with us how you managed that trade? Gracias

    • Raul Lopez

      Hello Mustaffa,

      As I said, I was just waiting for a retracement (remember I removed my stop entry order because of the NFP?), which is what we just got… So right now I’m looking for a long opportunity around the bottom of the range…

      But you need to be careful though, the FOMC minutes are released in a few hours from now…

      Good luck!

      • Mustaffa

        Thanks, Raul. It now retraced back to 0.8350 as you expected :) So I went long. I should have closed my trade when it was in profit, or not take it at all, then wait for pullback. I think it is much safer.

        Did you end up entering this trade or did you dismiss it?

        • Raul Lopez

          I’m in this trade sir.