Inspecting USDJPY’s failed breakout at key support; wrong way to trade - Soh Tiong Hum


Posted in Trading and Price Action By  On May 26, 2014

Failed breakout trades: those that do not deliver

Breakout strategies are wonderful because momentum and timing combines in just the right mix to produce quick money. Then there are also failed breaks that we covered here and here.
USDJPY price action last week provided us a recent example of a failed breakout so for learning purposes let’s take a look.

Anticipating that big break in USDJPY

I wrote in this story ‘Check higher time frames for significant support resistance levels‘ that USDJPY has tested a key support level many times in the past 5 months. Based on expectation, it was logical to conclude that:
1. Do not expect it to break
2. If it breaks, expect big move
However that secret side of me that wants immediate gratification also looked forward to a break and subsequent big move. Unfortunately USDJPY did not satisfy.
To recap, we observed that USDJPY bears need to overcome a support zone between 101.20 and 101.60.
USDJPY daily chart
Support resistance zone between 101.2 and 101.6 tried and tested

2 failed excursions below 101.20

On the 4-hourly time frame, this is what successful breakout trades should NOT look like. The bearish candlestick at Point 2 could be interpreted as a successful breakout with full close below support zone but alas it was immediately negated with a following engulfing candle. In fact we can turn around and call this a bear trap aka wash N rinse aka fading the short.
Failed breakout on H4
USDJPY made two excursions below 101.20
In this next chart, that failed penetration was nothing but the tail of a Doji on 21 May. In fact USDJPY rallied 80 pips from low on the same day.
False breakout on daily time frame
No signal no trade: Traders looking for signals on daily time frame saw a Doji at best

The right and wrong way to play breakouts in forex trading

Golden rules for forex trading (and any other tradeables)
  1. Buy high sell higher Buy low sell high
  2. Sell low buy lower Sell high buy low
Right and wrong way to trade breakouts
Sell high, buy low NOT sell low, hope to buy lower
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Source: http://www.terraseeds.com/blog/2014/05/inspecting-usdjpy-failed-breakout-at-key-support-wrong-way-to-trade/

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