Filed under Forex Strategies
I have posted a forex breakout trading strategy on one of my previous blog post showing you how to trade breakout in forex.
However, there are times where you might get stopped out when trading this strategy due to fake outs or whipsaw effects. So I will be showing you how to avoid fake outs and increase your odds of winning when trading this strategy.
First of all: What are fake outs?
In fact, fake out and whipsaw is the same thing with different description. Therefore in this post, I will be using the word fake out instead. So back to the question on what exactly are fake outs?
Fake outs are the movement of a price which looks like a start of a new trend but instead of continuing the movement in the direction, it moves back in the opposite direction.
So How Does It Affects You As A Trader?
In the case of trading forex breakout, a fake out may leads you to enter a trade thinking that the price has break through a trend line and will continue to run in the same direction.
After you enter a trade, you find the price moving back down turning your profit into losses within a short time and this is always the most frustrating moment of trading.
Here are some steps you can take to minimize fake outs when trading forex breakout:
1) Setup a MACD indicator: With the MACD indicator setup, you can make use of the trigger line to verify a trend line break. Most of the time when you have a fake out, the price will breach a resistance or support level but the MACD histogram did not flip to the other direction. If you have a valid breakout, the histogram will most probably flip to the direction you are going to trade.
2) Wait for a Retest of Trend Line: I have some friends who always wait patiently for the price to come back to retest the breakout before they enter a trade. This can also help to reduce your chance of being stop out due to fake outs.
3) Parabolic SARS: This is a very simple indicator that helps you to identify the price trend. If the dot is above the candle, you are looking for a downtrend and vice versa.
4) Avoid Low Volatility Currency Pair: One of the places where fake outs are common is currency pair that is less volatile. Therefore it is best for you to be more careful for currency pairs that are less volatile.
Basically, I use these tools to help me minimize my losses due to fake outs and I believe it can be of great help to you in your trading especially when you are trading forex breakout.
Try these steps out on a demo account and make sure you are okay with using them before transferring the tools to your live trading.
*You can also take a look at my first post on forex breakout trading made easy