It was said that amateurs like to trade breakouts (buy when price breaks resistance and sell when price breaks support) and the professionals like to do the oppposite. In fact, false breakouts are more frequent than real ones, hence, it may be profitable to trade with the pros. I read about this method from Grace Chang’s book, “7 Winning Strategies for Trading Forex“. There are many ways to fade breakouts but she recommends using a trendline. Note that this method is for FOREX and may not be proven in stocks or other markets.
Rules:
1) Use a time frame of at least an hour
2) Draw a trendline connecting 2 extreme points. For a downward trend, connect the highest 2 points and for an upward trend, connect the lowest 2 points. The points should have a distance apart and not too close together. The slope of the trendline should be gentle = less than 45 degrees, to consider it for trading
3) There should be some empty space between the 2 extreme points that you joined
4) Fade breakouts when the price break the trendline only on the third and fourth occassions. Buy when price breaks below trendline or sell when price breaks above trendline. Caution: Avoid fading breakouts when price moves towards the trendline too fast, as it has momentum to carry the breakout higher/lower.
5) Place a stop loss at least 20-30 pips from entry
Take a look at the 3 charts that I have prepared using this method. Seems like there are plenty opportunities for this method as I was able to find 3 occassions based on the previous trading day. The first two charts are downtrending and the third is an example on how you draw trendline for an upward trend. The first chart shows the 2 successful trades and the second shows 1 failed trade. The third chart shows potential for fading breakout.
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Hi Alvin,
Thanks for that. I think what the author was trying to demonstrate is a Tactical Move, ie when to short the AUD/USD for instance in your chart. That is if your Tactical Direction is the same as Strategic Direction. Basically, its shorting Oz in a countertrend move. However, if the Strategic Direction has changed or in the midst of changing, doing that is a sure way to be taken out and diced to pieces.
Yes Ryan. All entry and exit have to be tactical in nature, and must be in line with the larger trend as you mentioned.
Trendlines rocks but imho, be sure to draw on next higher time frame but find your entry on lower time frame :)
Oh yes, most experienced traders advocates multiple time frame analysis.
Have you tried it yourself? Be careful about fade breakouts, the result can be unpredictable.
Nope, I am not using this system. Anyway, no matter what method you use, the market is unpredictable!