Sunday, April 30, 2006

Forex Trading Breakout Strategies No3

Upward Breakout from a Downward trend - USDJPY

Following on from our strategy for taking advantage of an upward trend. Today we will look at another trading opportunity, using a downward trend as an example.

As well as trading the emerging trend we can sit on our hands and do nothing. Why? Well, trends don’t last indefinitely and a reversal will eventually happen. We spot reversals by breakouts from our trendlines.
In our picture, as the currency bounces up from our support it crashes right through our resistance. However, as we are being prudent we wait for confirmation that it is a true breakout. Confirmation does not come as the next two candlesticks from our breakout are bearish. After a short return to the downward trend we see a series of bullish indicators and watch the trend reverse over the next couple of hours (while we sit on our hands and do nothing!) Confirmation of the bullish move - to my mind - comes after the hollow spinning top. With our growing knowledge of the Japanese candlesticks, we enter our buy trade. Take quick profits or watch the trend develop, depending on your risk tolerance. I took quick profits - sure enough shortly after I cashed, out the developing upward trend fizzled out and dropped through my support line.

To be truthful the diagram above is not the best example of this type of trade. But in keeping with the tone of this blog I am trying to give examples of REAL trades, which I have personally done. Theory after all can prove anything!

Also with trades such as this I prefer to use a trailing stop loss (TSL) More of which later in the week as I discuss risk management.
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