Forex Trading Advanced Level Course
    About Lesson

    Trend lines

    In fading breakouts, always remember there should be SPACE between the trend line and price. If there is a gap between the trend line and the price, it means the price is heading more in the direction of the trend and away from the trend line. Like in the example below, having space between the trend line and price allows the price to retrace back towards the trend line, perhaps even breaking it and providing fading opportunities.

    The speed of price movement is also very important.

    A false breakout may be likely if the price is inching like a caterpillar toward the trend line. However, a fast price movement towards the trend line could be a successful breakout. With a high price movement speed, momentum can carry prices past the trend line and beyond. In this situation, stepping back from fading the breakout is better.

    How do we fade trend line breaks?

    How do we fade trend line breaks

    It’s straightforward. Just enter when the price pops back inside. This will allow you to take the safe route and avoid jumping the gun. You don’t want to sell above or below a trend line only to find out later that the breakout was real! Using the first chart example, let’s pinpoint possible entry points by zooming in briefly.

    Chart patterns are physical groupings of prices you can see with your own eyes. They are an essential part of technical analysis and also help you in your decision-making process.

    Two common patterns where false breakouts occur are:

    Head and Shoulders

    Double Top/Bottom.

    The head and shoulders chart pattern is one of the most problematic patterns for new traders to spot.

    However, with time and experience, this pattern can become an instrumental part of your trading arsenal. The head and shoulders pattern is considered a reversal. If formed at the end of an uptrend, it could signal a bearish reversal. Conversely, if it is formed at the end of a downtrend, it could signal a bullish reversal. Head and shoulders are known for generating false breakouts and creating perfect opportunities for fading breakouts. False breakouts are familiar with this pattern because many traders who notice this formation usually put their stop loss near the neckline.

    When the pattern experiences a false breakout, prices will usually rebound. Traders who have sold the downside breakout or bought the upside breakout will have their stops triggered when prices move against their positions. This usually is caused by institutional traders who want to scrape money from the hands of individual traders. In a head and shoulders pattern, you can assume that the first break tends to be false. You can fade the breakout with a limit order back in the neckline and just put your stop above the high of the fake-out candle. You could place your target a little below the high of the second shoulder or a little above the low of the second shoulder of the inverse pattern.

    The following pattern is the double top or the double bottom.

    The following pattern is the double top or the double bottom.

    Traders love these patterns! Why, you ask? Well, it is because they’re the easiest to spot! When the price breaks below the neckline, it signals a possible trend reversal. Because of this, plenty of traders place their entry orders near the neckline in case of a reversal. The problem with these chart patterns is that countless traders know them and place orders at similar positions. Similar to the head and shoulders pattern, you can place your order once the price goes back in to catch the bounce. You can set your stops just beyond the fake-out candle.