Do you trade the false breakout pattern?
This market pattern can be very successful when combined with strength and weakness and trending markets.
Hi, and welcome to this Blueberry Markets video update with me, John Kibbler, Head Currency Analyst.
In this video, I’m going to take a look at EUR/JPY again. But in this video, I’m going to show you why strength and weakness are so important in trading the markets. Essentially, I’m going to give you the easiest strategy to trade.
I’m showing a chart of EUR/JPY. This is built from the data set from the strength and weakness chart I showed you in the Forex Market Outlook. If you haven’t checked that out yet, you can watch it here.
Now, the JP Yen is the orange line, EUR is the blue line. We can see the price trading in the same direction for a while, we’ll also see this on the chart between November and December. You can see throughout November and December, we had two periods of range-bound markets. We can say that it was in an overall uptrend environment.
But, the key area for me is when the two currencies flip and start to diverge. This gives you a strong currency against the weaker ones.
We can see here that EUR is the blue line. It starts to bounce and heads higher while the JP Yen continues to fall, then they cross over here. This was around the start of February, slightly after, almost like the first week of February.
I want to look at EUR/JPY and show you that when prices are weak, or when a currency is weak and flatlining and one currency is strong, you have this happening. What are the effects of the trend?
If we take a look at the daily timeframe, we can see that the price nicely starts to form a trend after February.
We’re talking about a potential reversal here at the moment. But, the reason why the price is ranging is because of the strength and weakness. We need to see something change. That was ultimately what we were talking about yesterday.
However, what we can see is the price starting to change the trend. We get the market making higher highs and higher lows. That’s suggesting that the EUR is stronger than the JP Yen, which showed in the strength and weakness chart. The best way to trade this is to look for pullbacks into previous structure points.
I’m going to highlight these previous structures as we go up, and then I’m going to show you a key pattern you can watch when the price comes down to these levels. It doesn’t happen all the time, so you will miss some moves, but there’s a key pattern you can look for.
If we go down to the four-hour timeframe, you can look for one or two things.
Usually, when the price comes back down to a key point, we get false breakouts. Now, this is the pattern I really like to take a look at.
We can see that as price approaches the level and retests the structure, the market forms a low point. Then start to break to the upside. We get a nice break to the downside, then a rejection candlestick. This is the new low, which is important because if we place a little line on that new low, many traders would get involved too soon. They’ll see this low test candlestick or a hammer candlestick or pin candle, and say: “Well, I’m going to buy the high with my stop-loss tucked in below the low.”
Now, the pattern I like to look for is something called the false breakout. We talked about this quite often on the channel and when we talk about looking at false breakouts, we look at them in ranging environments. But, they also come in handy at key support and resistance levels.
What you look for is when prices form that low point or break off the area where you typically say: “I think we should go long here.”
I then look for a nice double bottom, but for the low to break the previous structure low and close within the double bottom range. Once we get that, that allows you to go long, stop losses can go below the low here by a few pips or ten pips or whatever you want to look for, and then look to trade back in the direction of the overall trend.
Going down to this one, we don’t get it here straight away because what I would look for is that double bottom pattern to come into play. We don’t get it, so now, we have to move on.
If we come down here, we can see that the price bounced into that level, creating a lower low. Again, candlestick breaks the low here. If we take a look at this area, what’s nice about this one is that we get the breakout close below, which is this candlestick here.
That’s going to push traders into getting involved, especially short-traders. They’ll look at that breakout and be like: “Yep, that’s something I want to be a part of.” Then, we get a bullish candlestick. Now, what happens in that situation is people that are short see that bullish candlestick, and they go: “I don’t want to be involved with this anymore; I don’t think this is something that’s going to break out.” So they exit their positions, essentially adding buy orders to the market.
Stop-losses are usually tucked in above these highs, and this is why we see such a huge rush when price breaks above these levels because stop orders are being taken out here. We get a lot of buy orders being triggered at that point.
So, false breakouts are a good way to start looking at taking positions in the market and looking for entries.
Change in trend
Alternatively, you can look for the change in trend. One of my favourites is looking for the changes in the trend and looking for the price to come back again; look for a similar type of pattern where the price starts making lower lows.
You get these low ranging candlesticks here. The price breaks the low of that previous low, close back within; there’s a nice opportunity to get long in there.
So, there are a couple of different ways you can look to trade those pullbacks. But strength and weakness ultimately allow you to be involved with these trends. You have to execute on the daily trend.
Look for the daily pullbacks. Once the price comes back into your key area of support, look at lower timeframes for changes in trend. Double bottom patterns are my favourite. But, these false breakouts works as well.
Thanks for watching this video update, and I’ll catch you in the next one.
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