Fading False Forex Breakouts

Simple Trading Strategy

I run an fairly large introducing brokerage company. By observing the successes
and failures of my clients and interacting with them, I am able to pick up on
what successful traders use to make money and the mistakes that unsuccessful
traders make to lose money. This is all backed up by hard numbers, since I am
able to view the performance of my clients.

After talking to a lot of my forex clients, it became evident to me that they use
pivot points quite a bit in their trading. Two particular areas that traders
like to focus on is the previous day’s high and low.

A crowd usually has the psychology that if the previous day’s high is crossed up
the general price move is up and they are more likely to buy than sell. The
opposite is true for when the previous day’s low is crossed down.

To add to that many traders use the previous day’s highs and lows as their
stops. So if the price crosses below the low traders will be stopped out and the
price will drop. The opposite is true for the previous day’s high.

Taking this information into consideration, I feel that I will have an edge in
the market by going long if the previous day’s high is crossed up and going
short if the previous day’s low is crossed down. I feel that the price move will
continue to go in the direction of the cross for at least a little bit.

Basic Rules for trading EUR/USD:

Price Action Strategy

To us a trading day is from 5pm EST to 5pm EST in forex.

1. Enter long on a stop order if the previous day’s high was crossed.

2. Exit on a limit if the trade gains approximately 10 pips. Exit on stop if the
trade looses approximately 30 pips.

3. Enter short on a stop order if the previous day’s low is crossed down.

4. Cover your short position if the trade gains approximately10 pips using a
limit order. Exit on a stop if the trade goes approximately 30 pips against you.

5. Only take the first high/low cross of the day.

Below is an example of an hourly chart.

Risk Control

With this strategy and any other strategy I discuss, it is critical to keep in
mind the 2% rule. The 2% rule should supersede any rule of a system. The 2% rule
states that you can never risk more than a certain percentage of your account on
any single trade. In my case this is usually 2%, but certain traders like to
kick the number up to 5%. Going above 5% in my opinion is an extremely bad idea.

Enhancements

The strategy that I described here is just a base for you to build on. There is
a lot of proprietary information that I have to hold back. Putting in and
testing out certain rules may enhance the system substantially. I will go
through some examples.

Only take the trades in the direction of the overall trend.
We back-tested a strategy very similar to the one I am describing here and a
great majority of our loosing trades were short, while a great majority of our
winning trades were long. Not so coincidentally the trend was primarily up during
the period of our back-testing. I suggest using a trend indicator such as a
moving average, trend candles tool in your software package (TopGun Software has
this tool you can find more information on our website), trend lines or a
parabolic SAR of some sorts.

Position Sizing Strategy

Since this system is very accurate, using an approach like the martingale that I
described in my previous article will help you. Doubling the position after every
losing trade may be a great idea. However it is imperative to never risk more
than 2% of your account on any trade so positions should be sized accordingly.
Pyramiding into the trades that go your way may enhance the performance quite a
bit as well.

Place your entry stop orders a pip or 2 above or below the pivot level.
By doing this you are ensuring that the price has actually crossed the pivot
level.

Variations

There are numerous ways you can play around with this system to fit your style.
Many traders like to straddle the opening price and go long if the price action
moves a certain amount of pips above it and go short if it moves below it. Some
traders like to keep this system on only during active market hours to ensure
the necessary volatility. You can use other pivot points such as the midpoint
and other support and resistance areas. What I described here to you is a simple
time tested trading idea of trading around a price now it is on you to develop
it into a system.

Execution Issues

What I described to you is a simple strategy that traders can use to be
successful. A variation strategy was actually taught to me by a friend who was a
former pit trader. By using various parameters and risk management tools you can
turn it into a robust system. I recommend trading this only on the EUR/USD pair
as other pairs seem to have a few too many spikes and the spreads are wider on
them which eats into the profits. I would be interested in seeing variations of
this approach you can email me. We use numerous strategies such as this and
tools to try to enhance the performance of our clients. Our research department
programmed in an approach similar to the one that I described above. Below is
the Wealth-Lab report on the strategy. Keep in mind that we are overly
conservative a back tested data is not indicative of future performance.

Below is a 7 months Intra day (hourly) Wealth-Lab back-tested report for you to
look at. This report is based on a $100,000 account with the initial position
size being 1 standard lot.