Forex Breakout Strategy

Forex Breakout Strategy

Written by: PaxForex analytics dept - Tuesday, 24 March 2020 0 comments

Probably you`ve seen one of the action trade positions in a narrow range when you were expecting the breakout/breakdown? From a historical point of view, it does make sense since in cases when the price is restrained by a narrow range usually there is a sharp spike (either up or down) after that.  It`s a great opportunity to significantly increase the account balance, one just needs to place orders according to the direction. 

The ones who monitor charts for these "spikes" are acknowledged that if it begins to move there is no way to catch up with it due to rapidly it soars or plunges. Consequently, most of the traders are left with nothing because they couldn`t react fast enough.

The next thing happening is that traders that have not managed to catch the wave become obsessed with the idea to break even.

 Essentially it leads to a disastrous result, as the sharp price movement tends to slow down, normally at about the time when traders commence following the trade, and this is when the price reverses, taking down all the Stop Losses and reducing the account balance.

The desire to hit the big time attracts a lot of traders which makes them trading breakouts/breakdowns since the reward potential is really amazing. Once applied to real-life it doesn`t seem to be that easy. For those who are still eager to succeed in taming big move following a tight trading range, there is a perfect method called "Pop ‘n’ Stop". Complying with risk management, the rejection bar candlestick pattern is added to the price movement. 

The screenshot attached above displays a narrow trading range followed by a breakout at the very beginning of the trading session, shown on the blue background and beginning close to the left side. As we know, in terms of the technical analysis it makes no difference for us why this breakout happened: either some natural disasters or important fundamental indicator has been published or just because of a lot of huge participants changing positions from short to long. Notwithstanding what precipitated the breakout, price movement first popped out of its narrow range and then suspended briefly which has been checked by the first white circle. Because of such performance, the strategy got its name - Pop ‘n’ Stop.
Right after the brief pause, two upward rejection bars appeared near a round number, indicated by the grey dotted line. It is known to be a rational price movement following a long and quick candlestick set into one direction; the correction to the spot of breakout happens because of the fast movement which crossed an area of moderate order activity and gaps form. As statistics shows, those gaps will be fulfilled once trading action recovers to regular.