Posted on January 26, 2010 - by Alvin

Fading Breakout with Trendlines for FOREX

It was said that amateurs like to trade breakouts (buy when price breaks resistance and sell when price breaks support) and the professionals like to do the oppposite. In fact, false breakouts are more frequent than real ones, hence, it may be profitable to trade with the pros. I read about this method from Grace Chang’s book, “7 Winning Strategies for Trading Forex“. There are many ways to fade breakouts but she recommends using a trendline. Note that this method is for FOREX and may not be proven in stocks or other markets.

Rules:

1) Use a time frame of at least an hour

2) Draw a trendline connecting 2 extreme points. For a downward trend, connect the highest 2 points and for an upward trend, connect the lowest 2 points. The points should have a distance apart and not too close together. The slope of the trendline should be gentle = less than 45 degrees, to consider it for trading

3) There should be some empty space between the 2 extreme points that you joined

4) Fade breakouts when the price break the trendline only on the third and fourth occassions. Buy when price breaks below trendline or sell when price breaks above trendline. Caution: Avoid fading breakouts when price moves towards the trendline too fast, as it has momentum to carry the breakout higher/lower. Read more…

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