What Is Breakout Fading? (Part I)
Fading breakouts refers to trading against breakouts when you believe that the currency prices will not be able to follow through action in the direction of the breakout. We fade breakouts when we believe that breakouts from support and resistance levels to be false and unsustainable.
Fading breakouts tends to be more effective as a short term strategy. It is not meant to be a long term strategy. False breakouts are also known as fakeouts. False breakouts are a bane for breakout traders but boon for breakout faders.
Support and resistance are seen as the price floor and the price ceiling respectively. Support level attracts the buyers enthusiasm for higher bids and prevents the price from falling further. The resistance level attracts the sellers enthusiasm for shorting. It prevents the price action from advancing higher.
The crowd likes to trade the breakout. The idea of trading breakouts appeals to many independent traders especially those new to currency trading. It is perfectly logical for the crowd to think that if the support level is penetrated, then the price action should move downward. The crowd is more likely to sell than to buy.
The opposite is true of a price break above the resistance level. The crowd usually concludes that if the resistance is broken, then the prices are more likely to advance higher in the rally. Hence, the crowd is more likely to buy than to sell.
Now you can understand why there tends to be large number of entry stop orders placed just above a resistance level and also placed below a support level. You will also find clusters of stop loss orders placed by traders who have brought near the support level or have sold near the resistance level.
When the currency prices crosses below the support level, long positions will be stopped out. Similarly, short positions will be stopped out when the price action breaks out above the resistance level.
Why most breakouts fail? One of the most important reasons why most breakouts fail is due to the fact that smart traders need to take the money from the novice and inexperience traders. The majority will cash out of the trading game broke. Always remember, it does not always pay to have the same mentality as the crowd.
Smart money belongs to the big players who have a couple of tricks to sabotage the crowd. The crowd holds the dumb money with the weak hands. Money has to be made from the majority. Not from the minority who got it right and know how to play the games.
When the crowd scrambles to get out of their losing positions, it causes vertical rallies or declines. The most money is made when the crowd turns out to be wrong. Read Part II for more. - 23212
Fading breakouts tends to be more effective as a short term strategy. It is not meant to be a long term strategy. False breakouts are also known as fakeouts. False breakouts are a bane for breakout traders but boon for breakout faders.
Support and resistance are seen as the price floor and the price ceiling respectively. Support level attracts the buyers enthusiasm for higher bids and prevents the price from falling further. The resistance level attracts the sellers enthusiasm for shorting. It prevents the price action from advancing higher.
The crowd likes to trade the breakout. The idea of trading breakouts appeals to many independent traders especially those new to currency trading. It is perfectly logical for the crowd to think that if the support level is penetrated, then the price action should move downward. The crowd is more likely to sell than to buy.
The opposite is true of a price break above the resistance level. The crowd usually concludes that if the resistance is broken, then the prices are more likely to advance higher in the rally. Hence, the crowd is more likely to buy than to sell.
Now you can understand why there tends to be large number of entry stop orders placed just above a resistance level and also placed below a support level. You will also find clusters of stop loss orders placed by traders who have brought near the support level or have sold near the resistance level.
When the currency prices crosses below the support level, long positions will be stopped out. Similarly, short positions will be stopped out when the price action breaks out above the resistance level.
Why most breakouts fail? One of the most important reasons why most breakouts fail is due to the fact that smart traders need to take the money from the novice and inexperience traders. The majority will cash out of the trading game broke. Always remember, it does not always pay to have the same mentality as the crowd.
Smart money belongs to the big players who have a couple of tricks to sabotage the crowd. The crowd holds the dumb money with the weak hands. Money has to be made from the majority. Not from the minority who got it right and know how to play the games.
When the crowd scrambles to get out of their losing positions, it causes vertical rallies or declines. The most money is made when the crowd turns out to be wrong. Read Part II for more. - 23212
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Know These Forex Broker Games. Learn Forex Trading!
posted by X - Men @ 1:16 AM
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