Tuesday, June 25, 2013

Avoiding fake breakouts

Trend traders like entering a market when a breakout of an important price level occurs. It maybe a break of an important number, or the area that was not breached in years. Unfortunately, there are numerous fake breaks in financial markets nowadays. It didn’t use to be that way. In fifties, sixties and even the last decade of the century you had a much bigger percentage of valid breakouts than you have now. If you are stock trader you would probably experience less of that, but for a currency trader like myself this is a common practice to enter a break and see it reverse in a few days, or even the same day. 

What should we do in this case? We should mix technical analysis with fundamental one. How? You can filter these technical breakouts by waiting for a confirmation from fundamental news. What does that mean? You need to wait for a very important event, such as CPI or Non-Farm payrolls, or Gross Domestic Product data to be released and if that is followed by a break of some price level, only then you do enter the market. I expected a break in Yen recently and what I got was a false break. The market took the price level before news came and the break turned out to be fake. 

So, by simply putting this filter on your trades you will avoid a lot of false breakouts and increase your risk reward ratio significantly.