Breakout trading is one of the most profitable forex trading strategy. It has the potential of making a lot of pips for you. But it can be frustrating most of the time to trade breakouts as most of the breakouts have a tendency to fail due to the lack of momentum in them. Most of these false breakouts are caused by forex brokers or other big players in the market to take out the small players in the market.
The trick in breakout trading lies in filtering out the false breakout from a true breakout. If you can somehow master how to filter a false breakout from a true breakout, you can avoid burning your fingers by trading these false breakouts. What you need is to develop a false breakout filtering system that can help you screen out a false breakout from a true breakout.
Here is one false breakout filtering forex strategy that you can master and trade highly profitably. This false breakout filtering forex strategy revolves around taking advantage of a strong trend in the market that is making higher highs or lowers lows. Suddenly it makes a low or high, fail, then reverse and start making highs or lows again as the case maybe.
Now, this type of a trade setup usually tends to have a very high success rate as most of the weak players in the market get flushed out by the false breakout leaving only the strong players. These strong real money players quickly reenter the market and push it further higher.
This is how you are going to play this strategy. Look for a currency pair making a 20 day high. Look for this pair to make a 2 day low in the next three days. Now, if this pair makes a 20 day high in the next 3 days after making the 2 day low, go long by placing the stop loss a few pips below the 2 day low that you had identified earlier. Protect profits by using a trailing stop.
Similarly, in case you find a currency pair making a 20 day low, look for it to reverse and make a 2 day high in the next three days. Enter into a short trade if you find this pair trading below the 20 day low in the next three days. Place the stop loss a few pips above the 2 day high that you have previously identified. Protect your profits by using a trailing stop. Good Luck!