3.FOREX STRATEGY : FADE THE BREAK

FADE THE BREAK STRATEGY

The  forex market  is  a  constant  battle  between  bulls  and  bears.  Sometimes this  fight  occurs  between  retail  and  institutional  traders.  It  is  common knowledge  that  institutional  traders prey on unassuming  retail  traders who sometimes  engage  in  emotional  trading.

Fade  the  break  is  a  strategy  that  follows  the  trail  of  the  institutional traders.  It allows  retail  traders  like  you and me  to pick up  the  clues  of  the smart money. Let’s get right into it.

Time Frame

The fade the break strategy works with the 15-minute (M15) or 30-minute

(M30) candle. This means that each candle on the chart represents 15 or

30 minutes of price movement.

Indicators

No  indicators are used  for  this  strategy. We use  support and  resistance levels only.

Currency Pairs

This strategy is suitable for all currency pairs listed on the broker’s plat- form, especially the seven major currency pairs of:

EUR/USD

USD/JPY

GBP/USD

USD/CHF

USD/CAD

AUD/USD

NZD/USD

Strategy Concept

Markets often reverse after a failure to break above the resistance level or below the support level. At the resistance level, the failure is characterized by the shadow of the candle that goes above the resistance level but fails to close above it. Subsequently the price falls back below the resistance level.

At  the  support  level,  the  failure  is  characterized  by  the  shadow  of the  candle  that  goes  below  the  support  level  but  fails  to  close  below  it.

Subsequently the price rises above the support level.

Many  retail  traders get  caught  at  exactly  these  levels  because  they take the “break” of the resistance as a signal that prices will continue to go up. Similarly, they assume that the break of the support is a signal that prices will continue to move down. Let’s see how to trade this setup when it occurs.

Long Trade Setup

We use the EUR/USD on the M30 time  frame to  illustrate long trades. Here

are the steps to execute the fade the break strategy for long:

1. Identify the support level.
2. Identify a candle that has a shadow that goes below the support level.
3. Wait for that candle to close as a bull candle. This is called the false- break candle. (See Figure 7.1.)
4. Enter at the opening of the next candle.
5. Set a stop loss of 5 pips below the low price of the false break candle.
6. Set two profit targets for this trade. Set the two targets at a risk to reward ratio of 1:1 and 1:2 respectively. (See Figure 7.2.)FIGURE 7.1 False-Break Candlestick

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