Fake Breakout Forex Reversal Strategy

A breakout that failed to continue beyond a level yields a “fake” breakout of that level.

Considering the vast number of breakout in the market that turns out unsuccessful, it is important to have a system ready that deals with such scenarios.

Fake breakouts tend to commonly occur in “Head and Shoulders” and “Double Top/Bottom” chart patterns and our examples deal with the former.

The free Fake Breakout forex reversal strategy teaches you how to make profits from fake breakouts that frequently occur in the forex market.

Chart Setup

MetaTrader4 Indicators: FX_Fish.ex4 (Input Variable modified; period=30), 50 EMA, regression_channel.ex4 (Input Variable modified; DrawText=false)

Preferred Time Frame(s): 1-Minute, 5-Minute, 15-Minute, 30-Minute, 1-Hour, 4-Hour, 1-Day

Recommended Trading Sessions: Any

Currency Pairs: Any pair

Download

Download the Fake Breakout Forex Reversal Strategy

Buy Trade Example

Fig. 1.0

Strategy

Long Entry Rules

Initiate a buy entry if the following indicator or chart pattern gets displayed:

  1. If the inverted Head and Shoulder pattern forms (refer to Fig. 1.0), wait for a fake breakout and a pullback that will probably retest the former breakout area as a trigger confirming the fake breakout. A signal to buy the currency of interest takes shape under such scenario.
  2. If price opens and closes above the resistance level and the magenta 50 EMA line crosses the blue line of the regression_channel.ex4 custom indicator bottom up, the sentiment in the market is said to be bullish, hence a trigger to go long.
  3. If the lime histograms of the FX_Fish.ex4 custom indicator aligns above the 0.00 signal level as seen on Fig. 1.0, it is a signal to buy the designated pair.

Stop Loss for Buy Entry: Place stop loss 2 pips below immediate support.

Exit Strategy/Take Profit for Buy Entry

Exit or take profit if the following holds sway:

  1. If the Head and Shoulder pattern forms along with a false breakout, but price breaks below the former breakout area during the retest, it is no confirmation of the fake breakout.
  2. If the magenta 50 EMA line crosses the blue line of the regression_channel.ex4 custom indicator top bottom and stay above the blue regression_channel.ex4 line, it is a trigger to exit or take profit at once.
  3. If the FX_Fish.ex4 custom indicator forms red histograms that are aligned below the 0.00 level, an exit or take profit is recommended.

Sell Entry Rules

Enter a sell order if the following rules or conditions takes precedence:

  1. If the Head and Shoulder pattern forms (refer to Fig. 1.1), wait for a fake breakout and a pullback that will probably retest the former breakout area i.e. the neckline as a trigger confirming the fake breakout. This represents a sell trigger.
  2. If price opens and closes below the support level and the magenta 50 EMA line crosses the blue line of the regression_channel.ex4 custom indicator top downward, the sentiment in the market is said to be bearish, hence a trigger to go short.
  3. If the red histograms of the FX_Fish.ex4 custom indicator aligns below the 0.00 signal level as seen on Fig. 1.1, it is a signal to sell the designated pair.

Stop Loss for Sell Entry: Place stop loss 2 pips above immediate resistance.

Exit Strategy/Take Profit for Sell Entry

Exit or take profit if the following holds true:

  1. If the Head and Shoulder pattern forms along with a false breakout, but price breaks above the former breakout area during the retest, it is no confirmation of the fake breakout.
  2. If the magenta 50 EMA line crosses the blue line of the regression_channel.ex4 custom indicator bottom up and stay below the blue regression_channel.ex4 line, it is a trigger to exit or take profit at once.
  3. If the FX_Fish.ex4 custom indicator forms lime histograms that are aligned above the 0.00 level, an exit or take profit is recommended.

Sell Trade Example

Fig. 1.1

Free Download

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About The Trading Indicators

The FX_Fish.ex4 custom indicator is an oscillator that can be used in defining trend i.e. the lime & red histograms are both used to depict bullish & bearish trends respectively.

The 50 EMA is an Exponential Moving Average set at period 50.

The regression_channel.ex4 indicator for MetaTrader 4 is one that draws a linear regression channel.