STRATEGY 3: FADE THE BREAK Time Frame Indicators Currency ...
STRATEGY 3: FADE THE BREAK The forex market is a constant battle between bulls and bears. Sometimes this fight occurs between retail and institutional traders. It is common knowledge that institutional traders prey on unassuming retail traders who sometimes engage in emotional trading. Fade the break is a strategy that follows the trail of the institutional traders. It allows retail traders like you and me to pick up the clues of the smart money. Let’s get right into it.
Time Frame The fade the break strategy works with the 15-minute (M15) or 30-minute (M30) candle. This means that each candle on the chart represents 15 or 30 minutes of price movement.
Indicators No indicators are used for this strategy. We use support and resistance levels only.
Currency Pairs This strategy is suitable for all currency pairs listed on the broker’s platform, especially the seven major currency pairs of: EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD
Strategy Concept Markets often reverse after a failure to break above the resistance level or below the support level. At the resistance level, the failure is characterized by the shadow of the candle that goes above the resistance level but fails to close above it. Subsequently the price falls back below the resistance level.
At the support level, the failure is characterized by the shadow of the candle that goes below the support level but fails to close below it. Subsequently the price rises above the support level. Many retail traders get caught at exactly these levels because they take the “break” of the resistance as a signal that prices will continue to go up. Similarly, they assume that the break of the support is a signal that prices will continue to move down. Let’s see how to trade this setup when it occurs.
Long Trade Setup We use the EUR/USD on the M30 time frame to illustrate long trades. Here are the steps to execute the fade the break strategy for long: 1. Identify the support level. 2. Identify a candle that has a shadow that goes below the support level. 3. Wait for that candle to close as a bull candle. This is called the false-
break candle. (See Figure 7.1.) 4. Enter at the opening of the next candle. 5. Set a stop loss of 5 pips below the low price of the false break candle. 6. Set two profit targets for this trade. Set the two targets at a risk to
reward ratio of 1:1 and 1:2 respectively. (See Figure 7.2.)
FIGURE 7.1 False-Break Candlestick Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.2
Enter at Opening of Next Candle
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.3
Trade Hits Profit Targets
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
7. In this example, the stop loss is 28 pips, the first profit target is 28 pips
from the entry price, and the second profit target is 56 pips from the entry price.
From the long example in Figure 7.3: Entry price = 1.3090 Stop loss = 1.3062 Profit target 1 = 1.3118 Profit target 2 = 1.3146 The risk for this trade is 28 pips, and the reward is 56 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Short Trade Setup We use the GBP/USD on the M15 time frame to illustrate short trades. Here are the steps to execute the fade the break strategy for short: 1. Identify the resistance level. 2. Identify a candle that has a shadow that goes above the resistance level. 3. Wait for that candle to close as a bear candle. This is called the false-
break candle. (See Figure 7.4.)
FIGURE 7.4 False-Break Candlestick Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
4. Enter at the opening of the next candle. 5. Set a stop loss of 5 pips above the high price of the false-break candle. 6. Set two profit targets for this trade. Set the two targets at a risk to
reward ratio of 1:1 and 1:2 respectively. (See Figure 7.5.) 7. In this example, the stop loss is 22 pips, the first profit target is 22 pips from the entry price, and the second profit target is 44 pips from the entry price.
FIGURE 7.5
Enter at Opening of Next Candlestick
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.6
Trade Hits Profit Targets
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
From the short example in Figure 7.6: Entry price = 1.5843 Stop loss = 1.5865 Profit target 1 = 1.5821 Profit target 2 = 1.5799 The risk for this trade is 22 pips, and the reward is 44 pips if both tar- gets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Strategy Roundup The main reason why false breaks occur is due to the tussle between retail and institutional traders. Both groups of traders easily identify levels of support and resistance, and false breaks are big clues for us retail traders that there is a lack of momentum to push prices further. Remember that false breaks are traps to catch day traders off guard. However, fade the break helps us to turn these traps into opportunities.
Time Frame The fade the break strategy works with the 15-minute (M15) or 30-minute (M30) candle. This means that each candle on the chart represents 15 or 30 minutes of price movement.
Indicators No indicators are used for this strategy. We use support and resistance levels only.
Currency Pairs This strategy is suitable for all currency pairs listed on the broker’s platform, especially the seven major currency pairs of: EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD
Strategy Concept Markets often reverse after a failure to break above the resistance level or below the support level. At the resistance level, the failure is characterized by the shadow of the candle that goes above the resistance level but fails to close above it. Subsequently the price falls back below the resistance level.
At the support level, the failure is characterized by the shadow of the candle that goes below the support level but fails to close below it. Subsequently the price rises above the support level. Many retail traders get caught at exactly these levels because they take the “break” of the resistance as a signal that prices will continue to go up. Similarly, they assume that the break of the support is a signal that prices will continue to move down. Let’s see how to trade this setup when it occurs.
Long Trade Setup We use the EUR/USD on the M30 time frame to illustrate long trades. Here are the steps to execute the fade the break strategy for long: 1. Identify the support level. 2. Identify a candle that has a shadow that goes below the support level. 3. Wait for that candle to close as a bull candle. This is called the false-
break candle. (See Figure 7.1.) 4. Enter at the opening of the next candle. 5. Set a stop loss of 5 pips below the low price of the false break candle. 6. Set two profit targets for this trade. Set the two targets at a risk to
reward ratio of 1:1 and 1:2 respectively. (See Figure 7.2.)
FIGURE 7.1 False-Break Candlestick Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.2
Enter at Opening of Next Candle
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.3
Trade Hits Profit Targets
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
7. In this example, the stop loss is 28 pips, the first profit target is 28 pips
from the entry price, and the second profit target is 56 pips from the entry price.
From the long example in Figure 7.3: Entry price = 1.3090 Stop loss = 1.3062 Profit target 1 = 1.3118 Profit target 2 = 1.3146 The risk for this trade is 28 pips, and the reward is 56 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Short Trade Setup We use the GBP/USD on the M15 time frame to illustrate short trades. Here are the steps to execute the fade the break strategy for short: 1. Identify the resistance level. 2. Identify a candle that has a shadow that goes above the resistance level. 3. Wait for that candle to close as a bear candle. This is called the false-
break candle. (See Figure 7.4.)
FIGURE 7.4 False-Break Candlestick Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
4. Enter at the opening of the next candle. 5. Set a stop loss of 5 pips above the high price of the false-break candle. 6. Set two profit targets for this trade. Set the two targets at a risk to
reward ratio of 1:1 and 1:2 respectively. (See Figure 7.5.) 7. In this example, the stop loss is 22 pips, the first profit target is 22 pips from the entry price, and the second profit target is 44 pips from the entry price.
FIGURE 7.5
Enter at Opening of Next Candlestick
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.6
Trade Hits Profit Targets
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
From the short example in Figure 7.6: Entry price = 1.5843 Stop loss = 1.5865 Profit target 1 = 1.5821 Profit target 2 = 1.5799 The risk for this trade is 22 pips, and the reward is 44 pips if both tar- gets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Strategy Roundup The main reason why false breaks occur is due to the tussle between retail and institutional traders. Both groups of traders easily identify levels of support and resistance, and false breaks are big clues for us retail traders that there is a lack of momentum to push prices further. Remember that false breaks are traps to catch day traders off guard. However, fade the break helps us to turn these traps into opportunities.
