Forex world

November 16, 2022

Reversal breakout pattern in forex trading

The reversal breakout pattern combined with multi-timeframe analysis will greatly improve its effectiveness.

Breakout patterns come in many forms, including continuation breakouts, patterns breakouts (ex: triangles, cup and handle patterns,...). However, within the scope of this article, i only share about the reversal breakout model, this is a very good model, especially suitable for traders who trade against the trend and optimize the R:R ratio.

This model is simply described through the image below:

Following are the advantages of trading the reversal breakout pattern:

- Actively choose entry points: Trading according to the reversal breakout pattern gives you the initiative in placing pending orders to enter orders. As the image above, you can choose 1 of 2 ways to place a pending order: First, when the price has not officially reversed, you will place a sell stop order (the selling price is lower than the current price - expected to match at the arrow first purple) at the trend break point; or the second way, when the price has officially broken the trend, you will place a Sell Limit order (the selling price is higher than the current price - expected to match at the 2nd purple arrow) to expect the price to return to test break and resume the downtrend.

- Go 1 beat slower, but safer: For traders who trade against the trend, such as the image above, they expect to catch the top of the price, which is the second top in the double top pattern, with expect the price to reverse and have an extremely small R:R ratio (Risk:Return). However, at the point where the price has not broken the trend, entering a sell order is always a big risk (because changing a trend takes time - see more in the article why you should trade with the trend). Therefore, the fact that we enter an order after the trend reversal is confirmed, we are choosing to slow down by 1 beat (the entry point is not as optimal as entering the order at the top) but it will be much safer.

- Going with the market: Going with the market trend is the fact that we are accompanying the market, there is no resistance to market movements. Specifically, when the price is going up, we (if we have an order) are still buying, and when the price reverses down, we switch to selling, this is a necessary flexibility for a trader to trade in the market as volatile as the forex market.

- Psychologically proactive: With pre-planned entry plans, we will keep an active trading mentality, from which we will gradually become patient, and gradually increase our confidence after each trade bring positive results.

However, the reversal breakout pattern also has the following disadvantages:

- Easy to get confused: Actually this pattern is very easy to get confused, the confusion here is not the wrong method, but mainly due to our ability to read the market wrong. Because before the real reversal, it is very common to have a "false breakout", especially when you follow the chart on the phone screen, or on the computer but the chart is enlarged, then the Observing the whole picture of the market will be limited, leading to incorrect judgment.

- The new trend has a moving wave that is too short, leading to the failure of profit expectations: In fact, there are many cases where the trend reverses from up to down, then the price only decreases for a short distance and then continue to reverse to increase again. If this is the case, with 1 entry around the breakout zone will not yield a good R:R ratio, leading to undesirable results.

So how to solve this problem? Is there a way to maximize the advantages and limit the disadvantages of this method? I would like to share a few suggestions below:

- Multi-timeframe analysis: When you use multi-timeframe analysis, it will be easy for you to predict whether a newly formed trend is likely to sustain long or short. And the key to multi timeframe analysis is that you have to experiment and come up with a set of timeframes that work well together. For example, you cannot analyze the set of 2 timeframes M30 and H1 because they are too close together, leading to inaccurate results. If it is the M30 time frame paired with H4, it will be more reasonable. This each individual needs to experience and have their own choice.

- Take a look at the market as a whole: To do this, just on your computer, keep the chart in the form of the smallest candlestick in your view, and on your phone, you should zoom it in as small as a bar chart.

A few things to share about the reversal breakout pattern, hope the article is useful to you.

Best regards,


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