Best Choice For Beginners!
Free Trading Education!
Free Demo Account!
Big Sign-up Bonus!
Perfect For Experienced Traders!
Breakout Strategy For Spot Forex Trading
The sharp price impulse means that the new market players appeared and made a decision moving market balance towards the purchase/sale. Forex breakout strategies shall estimate how «genuine» and long will be a trading signal so that the small market player could enter the market in the direction of large volumes − and to grasp the profit share from a new trend.
The main thing in these trade techniques is a proper analysis of volumes and behaviour of the price which is close to the critical price levels. Even though the trading signal on an entrance normally comes latein case of the sharp breakdown, it does not prevent the experienced trader to use strong movements by using some means, both for speculative profit, and for trend trade. Any technical or fundamental factors can also serve as the catalyst of this movement.
Forex breakout strategies are considered as a classics of the stock exchange trading and continue to prove the efficiency in any market. Their main idea is in that the market moves from one point of market balance to another. If the asset price long time cannot derate, then the market constantly accumulates «trade interest», and, so there shall be a break in a certain direction as result of the market decision. The fixed imbalance between purchase/sale leads to expansion of the trade range, and in search of a new point of balance quite good opportunities for trade appear. We will consider the main types of strategy below.
What is «true» breakout
Any situation of breakdown means market reaction of players with obvious interest in purchase or in sale. Breakdown gives the trade signal allowing to enter the market in the direction of large volumes together with strong players. And if it is correct to make everything, then a part of profit from a strong trend it will be obligatory yours.
Classical definition is the following: breakout is a crossing of the strong price level (support/resistance, borders of the channel, extreme values) after which the price will more likely move in the direction of the breakout, than will return back. For breakout in the market there shall be something serious to shift the price for serious distance.
It turns out that if the price approaches power levels, then two scenarios of behavior are possible:
- a release from the power level or a turn in the opposite direction;
- «true» breakout of the price is fixed beyond the level and continues to move in the direction of breakout.
The more abortive attempts of breakout occur («test») including «false» breakouts, the steadier and the more significant is the specific price level, and the bigger market effort will be required for its real overcoming. Reliable breakdown requires at least 2-3 tests on the period from H1 above, and then the more visible are kickbacks, the strong is the movement towards a new movement.
In the most standard options Forex breakout strategies encompass two trade tactics for opening of positions:
- on a «true» breakout – when the price is attached to certain levels the entrance is carried out in the direction of new movement through the market order or installation of the postponed order, for the purchase − higher than the level of possible breakout, for sale –lower than the level;
- an entrance on a final point of kickback (on the second kickback − at least!) in the direction of possible breakdown, as a rule, through the market order.
Closing of positions is carried out traditionally – on stops, trailing stop or by more tough rules of a money management because the volumes which caused breakdown completely have not been worked out, there is a high probability of the fast kickback. Main types of breakout are shown in the graphs below, breakout after movement near the key level (called as a BASE) received the name of «Gerchik’s breakout».
The characteristics of a «true» breakout:
- Closing of a breakout candle behind a price barrier (as it is possible further), especially strong is a situation when min/max candles also are behind level borders.
- The distance of closing of a candle from key level shall be more than the range of average volatility for 5-7 and more periods.
- If the price keeps behind key level within 3 and more temporary periods, then it is possible to consider that the breakdown proved to be true. For intraday and medium-term day trade by a control time span is the period usually of 2-3 hours.
- It is necessary to watch volumes, which accompanied movement of the price to, at the moment and after breakout. If breakout is not confirmed by splash in volumes, it means that it is just a current speculation and if you did not manage to open correctly in the direction of possible breakout, it is dangerous to enter based on the market, it is necessary to wait for closing of the current candle.
What is a «false» breakout and as «to see» it
Best Choice For Beginners!
Free Trading Education!
Free Demo Account!
Big Sign-up Bonus!
Perfect For Experienced Traders!
Technically breakout is considered «false» if it is a breakout at the price of some key level with subsequent fast (1-2 candles) turn in the opposite direction. As a result of the incorrect analysis, the trader opens the transaction towards breakout, but at the expense of a fast turn incurs the same fast losses.
The concept of the «false» breakout is directly connected with market psychology. This is a manifestation of a «gregarious» reflex in the market when the small players try to be in time on the leaving movement without serious analysis. As a result it turns out that they try to purchase at tops and to sell on minimum. «False» breakout is a market «trick», testing and collection of stops near the strong level. Therefore emergence of several «false» breakouts can be treated as the strong warning of the forthcoming direction of the market if the market players think in the direction opposite to the movement of the crowd.
Main types of «false» breakouts
«False» tests of the key levels begin to create long-term trends of the market. While creating strong levels of support/resistance, turning levels (Fibonacci, Murray) it is possible to draw to them the attention of small players and to wait for breakdown attempts to have an opportunity to trade against the «crowd».
Several criteria for filtering «false» breakouts:
- The main trend and key price levels are analysed on the timeframes, which are higher than for an entrance (from H1 above). If the medium-term trend remains, and on the small period breakdown attempts are visible, then the probability of regular speculation on purpose just is high «to gobble up» market plankton which constantly opens positions at the end of strong movement. The larger is the analysis period,the more reliable is the breakout.
- If the direction on a middle term and the direction of the current attempt of breakout are identical, then the chances of the «validity» of breakouts are much bigger.
- Except the moment of breakout, it is necessary to analyse the candle patterns through which the breakout was performed. A «true» breakout is created by the candle with a big body and small shadows closed behind the key level. It means that the market uses the serious considerable efforts in the direction of breakout. The popular graphical patterns, such as «the Double Bottom», «Double top» or «Head Shoulders» usually have strong trade interest in the field of the necks line or the line of key points. For this reason the set of the «false» breakouts are caused by regular working off of stops according to orders of small customers. Thereafter the price comes back with the same speed.
- All Forex breakout strategies for confirmation of breakout require that the Close price of the day candle was below the breakout level (in case of fall) and above the breakout level (with a growth).
- If the price breaks the support level, but at the same time on the oscillator, for example, on MACD, bull divergence was created, then it is more likely a «false» break. Similarly, when the price breaks the resistance, and on the indicator of oscillator type there is bear divergence, then this break is not suitable for position opening.
Breakdown on a pattern of «PIN-bars»
If the breakdown was unsuccessful, then it is possible to earn on a kickback from strong level, but most of traders, being fond of the analysis of behaviour of the price in a breakout zone, do not notice the opportunities that give rise to forming of the well-known PIN-bar.
Pin Bar (or Pinocchio bar) is one of the strongest turning models on the periods from H1 and above. After the first side candle most of which often looks as breakout of the level the central candle with a short body and a long shadow, so-called «nose» is created. The longer is the nose, the stronger will be the expected turning movement. The general scheme of a pattern and a classical technique of its working off is set out below.
- a «body» of no more than 20% of the size of a long shadow or in general without it;
- a «nose» shall come to an end far beyond the border of the «eyes», and the body shall be at the level of «eyes» and close to the opposite end of bar («hammer» in case of bull trend and the «turned» hammer in case of a bear trend);
- the PIN-bar shall not be an internal bar;
- opening/closing of PIN-bar shall happen in the range of the «left» eye.
The PIN-bar shall be located for the subsequent successful working off:
- near support/resistance levels;
- strong day or week max/min;
- Fibonacci’s levels;
- long moving averages;
- pivot point levels.
We open a position after closing of the «nose», best of all through the postponed BuyStop and SellStop ordersat max/min values of PIN-bar. The StopLoss level is within 3-5 points from a long shadow, a profit can be got by trailing or by partial position closing at the key levels of a pattern.
It is possible to use the special technical indicators for determination of the closest to an ideal (settings are configured!) and patterns, suitable for trade. After installation the Pinbar indicator automatically determines already created PIN-bars and highlights them by shooters of the corresponding colour and the direction.
Breakout strategy: main techniques
Classification of strategies is simple: breakout can be differentiated depending on a type of price level:
- support/resistance levels (including «round» levels);
- borders of channels (including dynamic);
- max/min levels;
- trend line;
- volatility levels.
Even the obvious fact of break of price level isn’t a sufficient trading signal. Any type of breakout requires confirmation by other technical indicators and necessarily volume indicators.
It is always necessary to remember that in any breakout the speculative component is very high, and therefore all Forex breakout strategies, especially short-term options, impose strict requirements to a money management. Trade on breakout without installation of stop losses is strictly forbidden.
Real examples of breakout strategy can be found in network, let’s not repeat, we will be limited only to short practical recommendations.
Techniques without indicators
Techniques without indicator are set up on the basis of the analysis of graphical patterns or price designs of Price Action. These techniques are popular among the beginners, but the correct identification of graphical figures requires considerable experience, and therefore use of such techniques is rather dangerous. Moreover, such strategies are not suitable for short-term trade.
Technique on breakout of trend lines
Historically the oldest and stable system constructed on a simple logic: on a bull trend (the line on the ascending max) we look for breakout down, on bear trend (the line on the descending min) — breakout up. This technique works at a timeframe from H1 above and only at trend sites.
Breakout strategies on breakout of price levels
The strong trade impulse is usually caused either by an entrance of large players (for achievement of new price profitable levels to it) or accumulation of trade volumes at the key levels. Price levels (static or dynamic) always exist on any asset and on any period. If taking into account consider that real open interest and the postponed orders are constantly visible to marketmakers and large players, then such strategy is most often used in the speculative purposes.
Example of the medium-term trade strategy of RaminLines on breakdown of price levels
Trade asset: any currency pair. Timeframe: H1.
- the candle is closed above blue level;
- Stochastics is not in an oversold zone;
- StopLoss is behind the next lower red level;
- TakeProfit is lower than the next top red level.
We open Sell if:
- the candle is closed below red level;
- Stochastics is not in an oversold zone;
- StopLoss is above the next blue level;
- TakeProfit is higher than the next top blue level.
Technique on breakout of moving averages
Classical moving averages of SMA and EMA with the strongest settlement periods (20,50,200) from the point of view of mathematics give to the breakout the additional force – the break and fixing of the price to these levels means an exit from the range – the strongest price levels, and their breakout means an exit from a zone of average value and forming of a new tendency.
Example of trade strategy on breakout of the range
Classical set of the moving averages, with confirmation of a trading signal by means of a slow moving and the modified oscillator. Positions are open on a trend of the senior period.
Trade asset: high-volatile currency pairs. Timeframe: for an entrance – M1, for the analysis — M5. For trade the period with the greatest volatility on an asset is chosen.
- the DSS indicator of momentum (an additional window) shows a pronounced bull trend;
- the price leaves out the limits of the upper bound of the channel of moving averages;
- the candle is closed above red moving average.
StopLoss is below the next local min.
We open Sell if:
- the DSS indicator of momentum (an additional window) shows the pronounced descending trend;
- the price leaves out of limits of the lower bound of the channel of moving averages;
- the candle is closed below red moving average.
StopLoss is put slightly above the next local max.
Closing of the transaction: the fixed size of a profit or a trailing along red moving average.
Trade technique on a new MAX (purchase) and a new MIN (sale)
From the point of view of the technical analysis the most steady combinations of breakout of power levels and breakout of the price channel. Each extremum shows a new border: maximum price resistance level, minimum price and support level. Price levels are constantly recalculated depending on dynamics of a situation in the market. The postponed orders are usually used.
Technique on breakout of max and min of a previous period
The breakout of the day range is most often used (for example, Linda Rashke’s strategy «80-20s»), but in principle it is possible to use any period above H1. The trade is done by two postponed orders: BuyStop is 10 points higher than the previous max (+10) and SellStop is 10 points lower than last min.
Technique on breakout of price channels
The best-known long-term breakout strategy of this kind is Richard Dennis Turtles which fulfills breakout of the 4 weeks channel.
Situations of breakdown of static or dynamic trend channels are most often worked out, but trade on a release in a wide flat can be effective (various versions of channels of Donchian – on extreme values, or Bollinger ‘s Strips on averages). The analysis of retest of borders of the channel on price history is applied as a check of «validity» of breakdown. The sliding stops on a on lines of borders are usually used for dynamic channels.
Technique on breakout of volatility
This is the one of the options of a swing trade based on the forecast of the future and rather short-term impulse is enough. Practice shows that if the market moves from the previous key level for some percent, the probability of movement in a selected destination increases. The indicator of volatility (ATR type) is needed. The higher is ATR indicator, the more probable is a close turn, the less its value, the trend is weaker and the market is quieter. The entrance to purchase is carried out in case of breakout of the line of the indicator in a zone of limiting border of volatility, and an entrance to sale – in case of an exit for the lower bound.
And as the conclusion …
Breakout strategies have probability of success not above the regular average statistics, but active advertising of the fast earnings with their help makes a deceptive impression. Beginners at first should pick up an effective set of filters of «false» breakouts for the trade system, and also learn to see the operating trend on several timeframe and it is determine correctly the key levels.
The Forex breakout strategies depend on non-standard market factors, technical sliding and speed of execution of orders. All systems of breakout-kickback give trading signals with delay, and therefore the transaction can open on residual movement of the price.
Forex on breakdown the trade techniques using behavior of the price in the field of strong price levels are considered as the best as strategy. As a rule, signals after the fact of breakdown are late, but by means of some receptions it is possible «to catch» steadily the strong movements which can give not only short-term profit, but also allow to open a position at the very beginning of a trend.
Of course, for a steady profit Forex breakout strategies need volatility, but in case of the correct use of these strategies it is enough to use the popular assets of middle volatility is usually enough (the main currency pairs, crosses, raw futures). The real effect is gained in case of trade longer than for an hour, but scalpers can also use signals on breakout as estimation of the probability of a turn. Source: Dewinforex
How to Trade Breakouts Using Trend Lines, Channels and Triangles
Just like breakouts on your face, the nice thing about breakout trading in forex is that opportunities are pretty easy to spot with the naked eye!
Unlike the former, you don’t even have to look in the mirror!
Once you start getting used to the signs of breakouts, you’ll be able to spot good potential trades fairly quickly.
By now you should be accustomed to looking at charts and recognizing familiar chart patterns that indicate a reversal breakout.
Here are just a few:
- Double Top/Bottom
- Head and Shoulders
- Triple Top/Bottom
For more information check out our lesson on chart patterns.
The first way to spot a possible breakout is to draw trend lines on a chart.
To draw a trend line, you simply look at a chart and draw a line that goes with the current trend.
When drawing trend lines it is best if you can connect at least two tops or bottoms together. The more tops or bottoms that connect, the stronger the trend line.
- The price could either bounce off the trend line and continue the trend.
- The price could breakout through the trend line and cause a reversal.
We want to take advantage of that breakout!
Looking at the price is not enough however. This is where using one or more of the indicators mentioned earlier in this lesson could help you tremendously.
Notice that as EUR/USD broke the trend line MACD was showing bearish momentum.
Using this information we can safely say that the breakout will continue to push the euro down and as traders, we should short this pair.
Another way to spot breakout opportunities is to draw trend channels.
Drawing trend channels are almost the same as drawing trend lines except that after you draw a trend line you have to add the other side.
Channels are useful because you can spot breakouts on either direction of the trend.
The approach is similar to how we approach trend lines in that we wait for the price to reach one of the channel lines and look at the indicators to help us make our decision.
Notice that the MACD was showing strong bearish momentum as EUR/USD broke below the lower line of the trend channel. This would’ve been a good sign to go short!
The third way you can spot breakout opportunities is by looking for triangles.
Our goal is to position ourselves when the market consolidates so that we can capture a move when a breakout occurs.
There are 3 types of triangles:
- Ascending triangle
- Descending triangle
- Symmetrical triangle
Ascending triangles form when there is a resistance level and the market price continues to make higher lows.
This is a sign that the bulls are slowly starting to gain momentum over the bears.
The story behind an ascending triangle is that each time the price reaches a certain high, there are several traders who are convinced about selling at that level, resulting in the price dropping back down.
On the other side, there are several traders who believe the price should be higher, and as the price begins to drop, buy higher than its previous low.
The result is a struggle between the bulls and bears which ultimately converges into an ultimate showdown…
What we are looking for is a breakout to the upside since ascending triangles are generally bullish signals. When we see a breach of the resistance level the proper decision would be to go long.
Descending triangles are basically the opposite of ascending triangles.
Sellers are continuing to put pressure on the buyers, and as a result, we start to see lower highs met by a strong support level.
Descending triangles are generally bearish signals. To take advantage of this, our goal is to position ourselves to go short if the price should breakout below the support level.
The third type of triangle is the symmetrical triangle.
Rather than having a horizontal support or resistance level, both the bulls and the bears create higher lows and lower highs and form an apex somewhere in the middle.
Unlike the ascending and descending triangles which are generally bullish and bearish signals, symmetrical triangles have NO directional bias.
You must be ready to trade a breakout on either side!
In the case of the symmetrical triangle, you want to position yourself to be ready for both an upside or downside breakout.
A perfect time to use the one-cancels-the-other (OCO) order! Don’t remember what an OCO order is? Go review your types of orders!
In this scenario, GBP/USD broke out on the upside and our long entry was triggered.
Breaking down the Triangle Breakouts
To help you memorize the different types of triangle breakouts, just think of facial breakouts.
Descending triangles usually breakout to the downside. So when you think of descending triangles, think of breaking out on your chin.
Symmetrical triangles can break either to the upside or the downside. So when you think of symmetrical triangles, think of breaking out on both your chin and forehead.
“Why do you keep staring at my pimples?!”
Here’s a quick and disgusting memory tickler:
Ascending triangle = Forehead breakout
Descending triangle = Chin breakout
Symmetrical triangle = Forehead OR chin breakout
3 Forex Trading Strategies For Serious Traders That Work!
Updated: November 21, 2020
If you’ve found yourself on this page – I am going to assume you’re very passionate about Forex trading and want to go places with it.
The sad truth is that there are a lot of potato strategies getting cooked up in bedrooms, and passed around on forums, branded the holy grail.
Everyone’s time is precious! There is nothing worse than wasting a lot of your time on a trading system that leads you down the wrong rabbit hole.
Time is a commodity that is non-refundable.
Don’t get me wrong – there is some golden information out there, but you need to have a bit of industry experience under your belt to be able to ‘filter’ what’s worth investing energy into.
The crazy amount of foreign exchange information that poor in when you do a google search can be an overwhelming, and dilute your ability to find reliable trading strategies to get you going.
You might already be trading Forex, but looking for simpler Forex trading strategies to supplement your current regime.
In this tutorial, I am going to share 3 strategies with you which are:
- Forex Trading Indicator free, only need clean price charts
- Require no ‘extra’ tools, just your charting software
- Have a simple & effective price action approach
- Reveal straight-froward, uncomplicated trade signals you can spot easily
When Forex strategies have these kinds of properties, they are easy to stick with for the long run (like a well designed diet).
Let’s put things into gear, and begin…
Forex Trading Strategies Using ‘Indecision Doji’ Candles As Breakout Trading Setups
This is one of the most overlooked and underestimated Forex trading strategies!
There are many definitions for a Doji candle – you can probably find over 10 variants! I am going to stick with the generic definition here, which I think works best.
The ‘ indecision’ Doji ‘ is the one I trade – it’s a very simple to understand signal, and extremely easy to spot on the charts too.
An indecision Doji candle has a small centered body, with wicks protruding out both ends of the body .
As the title suggests, this candlestick pattern represents indecision. The market is communicating to you that it tried to move higher, and it tried to move lower, but ultimately closed off back around the opening price.
The idea is to catch the breakout of the indecision. In general, we aim to catch bullish runs as price breaks the high, or bearish moves as the market breaks the low of the Doji.
Above: The basic way to trade these is to wait for a breakout from the ‘indecision’ the candle represents. We do this by catching price as it breaks above (buy), or below the candle range (sell).
There are also some more advanced tactics where we wait for a break of one end of the Doji, but only take action if it fakes out, reverses, and breaks the other end instead.
Doji candles print very frequently, and can be seen across a few time frames. Very easy also to spot with your eye!
Above: Yep, Doji candles form often, across all time frames.
One important thing to remember is that the more ‘data’ that you have packed into a candlestick pattern, the more reliable it will be.
Meaning: A Doji on the Daily time frame has magnitudes more value than a Doji on the 5 minute time frame – which is true for any price action Forex trading strategy.
In my crazy price action Forex tips article – I talk about how traders screw themselves over constantly by trading candlestick signals in isolation and give away my approach to a candlestick signal trading strategy decision.
So, the first lesson is: don’t trade every single Doji you see!
What is the difference between a good and a bad Doji signal?
We want to target them at points on the chart which have high technical value . Locations where you know the market has a ‘decision’ to make.
Looking for key locations like:
- Proven support and resistance levels
- Swing levels within a trend
- Trend line structures
- Any point on the chart your technical analysis tells you the market should ‘break or bounce’
Check out this Doji setup below…
Above: The indecision signal formed on a weekly support level – where we highly anticipate a ‘bounce’.
With that logic in mind – we only look for bullish breakouts
Above: As expected, a ‘bounce’ occurred off the major level, and price broke above the indecision high – kicking in our bullish trade order.
It’s all about using your technical analysis to find key areas where you know the price action has a ‘break or bounce’ decision to make. Wait for an Indecision Doji to form, then trade the expected outcome (usually bounces).
Above: With simple technical analysis – we easily spot a clear resistance level on the chart.
An indecision Doji candlestick pattern forms, so we look for bearish follow through off resistance (trading the bounce), and use the break of the Doji low as a trade trigger.
Above: The market follows through with the indecision breakout, and explodes downwards.
We can also use them in trending conditions to catch trend continuation.
T he best place to target Dojis in a trend is at swing levels (old support turned new resistance, or reverse of that).
Above: In a trending environment – look for indecision Dojis that form at swing levels. Target breaks in the direction of the trend.
Above: A nice result after trend momentum picked up via the swing point, broke the Doji high to trigger the trade, and continued to trend higher for days.
It is as simple as it is critical, that you perform good technical analysis first – then you can line up your Doji breakout idea to see if it fits.
Above: A glance at what separates a good indecision breakout opportunity from a bad one.
Remember, Dojis form very regularly – it’s your job to use your basic technical analysis to filter the bad from the good.
If you don’t have good chart reading skills, and can’t pick up the basic structure or context of the market – you might run into frequent trouble trying to trade these candlestick patterns…
When you apply this Forex strategy – just remember you will see a lot of Dojis printed, but only a small selection of them will be good trading opportunities.
Some key points to remember
- Do your technical analysis first before you consider the Doji as a trade opportunity. In most cases, simple price action analysis will rule it out as a viable trade
- Match them up with important technical points on the chart, where you know the market has an important decision to make – then plan to trade the ‘break or bounce’ via the Doji breakout
- Don’t be tempted to trade Dojis on low time frames – the less data in the candlestick, the less reliable the pattern.
The Flag Pattern – A Trend Continuation Strategy
In my opinion, flag breakouts are one of, if not the best Forex trading strategy for trending markets.
Because of the simple nature – flag breakouts are another overlooked gem, usually because Forex traders are always chasing the more complicated methodologies!
Like always, flag breaks work well on higher time frames – but I’ve even seen them work well on charts like 1 hour time frame!
Here is my ‘to the point’ breakdown of what flag patterns are, and how I trade them:
- A trending structure must be in place.
- A counter sloped, trend line develops against the existing dominant trend (the flag line)
- The flag line breaks in the direction of the trend
- Trade the ‘breakout candle’
Let’s look at an example.
Above: This is my text-book scenario for a bullish flag breakout. A strong trend in place, then shorter frequency lower highs develop against the trend – creating a counter-trend, trend-line.
We’re now waiting for the flag line to break, which signals trend continuation.
Above: A breakout signal! A bullish candle closes above the flag structure. We’re looking for a convincing close here, not a candle with a large upper wick.
Once we have the breakout candle, that’s our cue to get long. There are a few different entry, stop loss, and money management combination you can apply here.
I can’t cover them all here, I’ve dedicated a few modules to these subjects in our War Room Forex course.
The basic way is to buy/sell the breakout candle event (after it closes), and place a stop loss below the breakout candle.
If the breakout candle is really large, then other strategies need to be deployed to tighten the stop.
Above: The follow through move after a breakout candle busted the flag structure.
Hopefully you can see the value in this as a trend continuation strategy.
When the market is trending, these flags are actually forming all the time, right under your nose. If you haven’t been looking for them, then you’ve probably been overlooking many opportunities.
If you’re into the lower time frames (like 1 hour), open up your charts and check out what you’ve been missing…
Above: Even on a 1 hour chart, flag structures are actually worth looking out for.
You can see above during a strong trend, even the 1 hour chart produced the goods. The 1 hour chart is normally a difficult chart to apply swing trading strategies to, but flag breaks within trends just work so nicely.
Above: The power of catching flag breakouts within a trending environment. They key is to make sure the broader market is trending before you consider looking for flag trade opportunities.
You do see flags form within consolidation or in ranging cycles, but they just don’t offer the reliability, or reward potential. That’s why I only use them as a trend continuation trading strategy.
The Rejection Candlestick Reversal Trading Strategy
The rejection candle is one of my most utilized candlestick pattern signals.
The anatomy and concept is similar to the classic ‘Pin Bar’ – which is the most engaged topic of interest in all the price action discussions, and communities online.
Rejection candles are a candlestick pattern that communicates denial of higher or lower prices . The market tries to move to an area, but it ‘rejected’ by the market.
This denial leaves a very distinct feature in the anatomy of the candlestick – a long lower or upper wick.
The better quality rejection candles pack thicker candle bodies (closing in the direction of the rejection).
Above: Simple anatomy diagram, comparing the classic pin bar to the more authoritative rejection candle pattern that I use.
Rejection candles have a thicker body. The ‘bounce’ from the rejection causes the closing price to be higher or lower than the open price.
The thicker body demonstrates more strength and authority as a reversal signal in the rejection candle anatomy.
What’s the #1 quality factor for rejection candles?
I am going to stay something stupidly simple here – the key is to match them up with technical areas on your chart, where you expect price to reverse.
Such a simple concept that many traders don’t use ! Most Forex traders out there will trade any and every rejection candle (or pin bar), that pops up on their chart.
I like to target these guys at:
- Weekly support or resistance, the major turning points (counter-trend opportunities)
- Swing points within a trend (trend continuation opportunities)
- Range tops and bottoms
- Very over extended prices (mean reversion opportunities)
Check out the bearish rejection setup below…
Above: A nice bearish rejection candle forming at a resistance level. Remember, rejection candles are a reversal signal – and strong resistance levels are an expected turning point. The signal matches the context!
Above: A very nice follow through move to the down side, after the bearish rejection sell signal printed.
Don’t fall into the trap of ‘trading every candlestick pattern’, just because they’re there. Get into the habit of doing technical analysis first, then build that analysis to the candlestick trade idea, for synergy and quality control.
Above: Simple technical analysis tells us this level is likely to cause the market to bounce, as old resistance holds as new support.
The bullish rejection is printed as a result of a bounce (at least the beginnings of one) – therefor it fits well with our technical analysis, and has a lot of synergy with what’s going with the chart.
Above: The technical analysis and the rejection signal both play out as expected, and become a profitable trade idea.
It’s just as simple as lining up the rejection candle (a reversal signal), which those likely reversal points on your chart.
Try to avoid trading rejection candles when there is a lot of congestion to the left.
Above: An example of not lining up technical analysis, context, or reversal points with your rejection candle signals.
These are dud signals because they hardly met any of the analytical quality control points we’ve talked about in this tutorial.
If you see heavy congestion to the left, and the rejection candle formed in the middle of it all – then that’s a red flag.
Also if you plan to go against the trend (which can be profitable), you better line up strong rejection candles with major reversal points (tip: get these from weekly time frame)
When you look back through your charts to evaluate these signals, take note: you will find them everywhere!
Be careful of confirmation bias – which means you only ‘see’ the profitable signals located at the tops and bottoms of moves in history, but you over look the signals in-between, which are the ones you would have likely been screwed over ‘in the trading moment’.
Rejection candles & pin bars are a fairly straight forward signal, but they are not the holy grail ATM machine that prints out everlasting money (which is how I’ve seen them promoted). They are only lucrative when combined with good technical, and price action analysis .
Forex Traders – Make These Forex Trading Strategies Work For You
I’ve given you a lot of brain food here – ideas should be pouring out of your ears!
The most successful Forex trading strategies need to go beyond the charts. We need strong money management and a solid mindset to complete the recipe for long term survivability in the markets.
Obviously there are risk management techniques that need to be coupled to the strategies you’ve just be shown here. There are ‘risk mitigation’ strategies that I have modeled, and some other aggressive strategies.
But for simplicity sake: my goal is to always make sure that winners pay up way more than my losses – at least 3x more in fact. This positive risk reward ratio is the key to keeping your head above water, and eventually turning a profit over many trades!
There is a saying among experienced Forex traders: “Forex is simple, but it is not easy!”
What we’ve discussed here today is the simple technical side of trading, however, the true mastery comes from a trader’s mind-set, and is what makes him/her a winner in the end. That’s the insanely difficult part no one talks about.
To make these strategies work for you, you’re going to need to be disciplined, focused, and consistent with what you do in the markets. I recommend reading “Trading in the Zone” by Mark Douglas.
That book will give you a real good kick up the culo, and start to dramatically change how you think about your trading.
Did the strategies in this tutorial spark your passion? If so, feel free to look through my other Forex tutorials and videos here – there is a lot of helpful information for free on the site for you.
If you want to really get involved with how I trade, learn all my strategies, secrets, or even get a hold of my custom metatrader software (which does some crazy stuff) – then you’re welcome to check out my private War Room program for Traders.
It contains everything under the one membership to keep things simple – just the way I like my Forex.
So, these are my ‘getting started’ Forex trading strategies that work in today’s markets – which should be especially helpful to newbies.
I truly hope you got some value from this tutorial, and are ready to dig into your trading and try some of this stuff out.
If you liked the content, don’t forget to leave me your comment below.
Best Choice For Beginners!
Free Trading Education!
Free Demo Account!
Big Sign-up Bonus!
Perfect For Experienced Traders!