Fading False Breakouts in Forex


ForexEvery now and again I look through Forex trading strategies which are getting discussed on various internet forums. Typically, most of the strategies are promoted by traders who are knew and don’t yet understand the flaws in what they are saying. For example, it always made me sad to see someone push a trading strategy with a lot of custom indicators whose formulae they don’t know let alone understand and end with the comment “works only on USDJPY and has given great returns for the last three months”. This is someone who is going to lose a lot or even all their account quite soon if they keep doing down that same path. Three months is no time at all over which to judge a trading strategy. If the strategy is robust, why would it only work with one pair such as the USD/JPY?

One a few occasions though I can find a simple and potentially strong concept being presented and discussed for use throughout Forex, without any indicators or overly complex rules. These are likely to be better approaches to investigate and to get involved in than overelaborate, multiple indicator trading systems.

An example of one of the better robust concepts in Forex is the false breakout reversal, which can also be a double top / double bottom strategy. These are also known as “2B breakouts”. The basic concept is this: there is a swing low or high, the price returns to it and briefly exceeds it before reversing strongly. If you look at Forex charts, you will notice that key lows or highs are often briefly exceeded before a reversal takes off.

One reason this approach can work well in Forex is that the price usually spends a lot of time ranging, rejecting highs and lows, often seeming to breakout but then to go and quickly reverse. Hopefully over the coming days I will be able to publish the results of some tests of this concept on historical Forex prices.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment.