Fading breakouts refers to trading against breakouts. When we believe that breakouts from support and resistance levels to be false and unsustainable we fade breakouts. Suppose you believe that the currency prices will not be able to follow through action in the direction of the breakout. You trade in the opposite direction of the breakout.
False breakouts are a bane for breakout traders but boon for breakout faders. False breakouts are also known as fakeouts. Fading breakouts tends to be more effective as a short term strategy. Fading breakout is not meant to be a long term strategy.
Support level attracts the buyers enthusiasm for higher bids. It prevents the price from falling further. The resistance level attracts the sellers enthusiasm for shorting and it prevents the price action from advancing higher. Support and resistance are seen as the price floor and the price ceiling respectively.
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 and 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 when the price action breaks the resistance level from below.
You will find clusters of stop loss orders placed by traders who have brought near the support level or have sold near the resistance level. Now you can also understand why there tends to be large number of entry stop orders placed just above a resistance level and also placed just below a support 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.
You will ask why most breakouts fail? The fact that smart traders need to take the money from the novice and inexperience traders is one of the most important reasons why most breakouts fail. Always remember, it does not always pay to have the same mentality as the crowd. The majority will cash out of the trading game broke.
The crowd holds the dumb money with the weak hands. Smart money belongs to the big players who have a couple of tricks to sabotage the crowd. Money has to be made from the majority. Not from the minority who got it right.
It causes vertical rallies or declines when the crowd scrambles to get out of their losing positions. Most money is made when the crowd turns out to be wrong. Read Part II for more on Breakout Fading.
False breakouts are a bane for breakout traders but boon for breakout faders. False breakouts are also known as fakeouts. Fading breakouts tends to be more effective as a short term strategy. Fading breakout is not meant to be a long term strategy.
Support level attracts the buyers enthusiasm for higher bids. It prevents the price from falling further. The resistance level attracts the sellers enthusiasm for shorting and it prevents the price action from advancing higher. Support and resistance are seen as the price floor and the price ceiling respectively.
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 and 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 when the price action breaks the resistance level from below.
You will find clusters of stop loss orders placed by traders who have brought near the support level or have sold near the resistance level. Now you can also understand why there tends to be large number of entry stop orders placed just above a resistance level and also placed just below a support 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.
You will ask why most breakouts fail? The fact that smart traders need to take the money from the novice and inexperience traders is one of the most important reasons why most breakouts fail. Always remember, it does not always pay to have the same mentality as the crowd. The majority will cash out of the trading game broke.
The crowd holds the dumb money with the weak hands. Smart money belongs to the big players who have a couple of tricks to sabotage the crowd. Money has to be made from the majority. Not from the minority who got it right.
It causes vertical rallies or declines when the crowd scrambles to get out of their losing positions. Most money is made when the crowd turns out to be wrong. Read Part II for more on Breakout Fading.
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Know These Forex Broker Games. Learn Forex Trading!
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