Two FX Price Action Setups That Often Fail


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Good FX traders are highly skilled at identifying price action and candlestick formations that indicate high probability trend reversals or continuation patterns. However, just as some price action patterns can be a bit of a nod by the markets to get involved, there are others which you should use as a confirmation of staying out of the market.

In this article we’re going to look at when NOT to trade FX based on dodgy price action. There are certain price action patters that trick gullible traders into woeful trading positions…

Beware Of The Following FX Price Action Patterns

  • False breakouts at key support or resistance levels. FX traders must always respect key support and resistance areas. They are strongholds which price has obeyed for a substantial period, and are not likely to be broken with ease. Not genuinely. False breakouts happen a lot within the fx trading universe, and knowing a false break out from a genuine one is so often one of those subtle differences between a wily old trader and a rosy cheeked newbie. Here’s how a false breakout goes down – price is squatting on a key support level and a huge price bar penetrates down past the support line seemingly breaking out. Inexperienced traders are tempted to go short in this instance – of course the price promptly reverses and climbs back up to respect the previous support.  It’s a false breakout. There are reliable ways to check if a breakout bar is likely to be genuine or not. For a start, let the bar finish! Many inexperienced traders jump in before the candlestick period has even completed. Sometimes the price will poke it’s head past support or resistance but by the time the price candlestick is completed, price will end up back within the support/resistance boundary. There will simply be a tall wick to show where price had pierced the support/resistance. Another way of getting a feel for whether you’re seeing a genuine versus fake breakout is to look at your other indicators. For example if price is at support, and  your indicators are in massively oversold territory, it would take something epic to push the price lower still.
  • Taking positions at extreme highs/lows and after HUGE price bars. There are two conflicting mantra’s within fx trading. The first is buy low, sell high and this contradicts the whole “trend is your friend” rhetoric. They actually are both true – but need to be applied aptly according to the mood and position of the market. Sometimes, new FX traders will try and make use of a trend by entering just as price has made a giant leap up (or down). The problem with entering after a huge price bar has just completed is in missing the majority of the move. After a really huge price move, as represented by a candlestick with a freakishly tall body, the risk is that a lot of the momentum might well have been sapped up already. In fact, there will be times when the price will take a breather or even reverse as some FX traders will close their positions to secure their profit. There are hints that can help good FX traders avoid opening bad positions at extreme highs/lows or after a huge price candle. For a start, if the price ends up near a support/resistance level, it would be extremely risky to open a position. Further, momentum indicators should be able to provide a feel as to if there are likely to be any legs left in the trade.

Remember that candlesticks and price patterns are as just valuable in helping fx traders side-step potential train wrecks, as they are in helping them into opening high probability fx positions.