Having a Breakout Strategy using patterns is a great way to win in Forex trading. Then again, one cannot rely solely on them; learning the other trading fundamentals is as important too.

This video will tackle a sound Breakout strategy that works in today’s market which will definitely help you tremendously in your Forex trading career (as well as stocks and futures).

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Forex Breakout Strategy

Welcome to this FOREX trading training today, trading Breakout Strategy Patterns, and this is based on, well in top dog trading, we call it the rule of three. I should mention that this will also work with futures and with stocks as well, but today we’re going to show it to you on FOREX, it’s a simple pattern, but it has a very profound psychological, logic behind it. So we look at a level such as this high, and we’re looking basically for a level that really stands out that a lot of people are going to see. This is a daily chart, by the way, therefore they’re going to see a big move appear. Big move down to there and this is important because this is why it works. It’s the mass psychology of it that a lot of people are going to see.

That is a major swing high. Again, especially since it’s on a daily chart and lots of people look at daily charts, you’ve got masses of people seeing that high. Now, where the psychology comes into that is as the market comes back to approach that same level, you’re going to have three types of reactions, but they’re all based around the same issue that people are looking at that last high in saying that’s as high as the market would go. In other words, that’s the most people were willing to pay for this particular market. Now that we’re a few months out into the future here, the market remembers. It has a memory as people say. This is probably the best illustration of the market having a memory is people looking at that and saying back then we couldn’t get enough people to buy at a higher price.

Forex Daily Breakout Strategy

Think of it like I’m going to buy a car. And the car lot has 50, they have a particular model and they want to know they want to move those cars, of course. But nobody’s willing to pay more than what they’re asking. So everybody’s trying to get a deal or nobody’s just interested at that price at all, zero. What did they have to do? All the car dealerships going to lower the price, supply and demand, basic economics that people are watching that level and they’re going to say, ‘I wonder what the other people in the market are going to do when we get back to that price, we’ll send them that change’. Will there be people willing to pay more? But the doubt is there. That’s the key, doubt, hesitation, lack of confidence, lack of certainty in the masses.

Therefore, it is most likely to fail. That is the one that the first attempt. Here’s the point, so this is the first time that we got up to this price level and then this is the second time and you’ll see that yes, it did get above it, but then it came right back below it. So it technically failed them. You couldn’t get a large number of people across the globe that have this plan, who we lovingly call earth to go ahead and pay more money, couldn’t get enough buying traction for the price to go up. So conversely, of course, the price goes down and that’s the psychology of it. Now, three things happen. As I mentioned on those three things are number one, some people are going to look at this price level and they’re going to say, ‘I’m just not gonna do anything right?’

Forex Breakout Strategy Rules

It’s coming up there. I’m thinking of buying. These will be your potential breakout traders and some people will buy. We did get some prices above there and so some people say, no, I’m looking to buy. And then, on the other hand, the same breakout traders will say, I’ll buy it literally. Technically if you’re going to account pips, it broke above that high, so you’re going to get some buyers. They get stopped out, they get screwed, right? Hate that. Nobody likes that false breakout. The number two thing that happens is that some people will short that and so they’re looking for this kind of pattern. They’re looking specifically for false breakouts.

I think this is actually a better higher probability pattern to trade and they’re going to take a short and then you’ve got people who perhaps bought down here. This is group number three and group number three bought down here and I’m going to take profits into this level because they say ‘this is as high as we could go before, therefore, I’m going to lock in some profits there.’ Again, this is called the top dog trading rule of three and won’t even move forward a little bit more. We’ll squish up the chart a little bit so you can see the big picture. This is where the top dog trading rule of three comes in. So this again was the first. So this was the first time it reached that price level one. Less likely to continue. Could it continue?

Forex Trendline Breakout Strategy

Could it go above that resistance level? Sometimes it does, but your highest probability is the third, the rule of three. And the reason again goes back to psychology because now people are saying, ‘here’s this price level that has lasted this entire time.’ And what happens here, we gap above it, and this will be what happens sometimes when the market really wants to move. It will just gap right above that resistance level and not deal with it. So now the people that were going to take profits at it, well we’re already above. So now they’re thinking, ‘maybe I’ll stay in it because maybe this thing is going to go.’ The breakout traders who are buying will, they’re in and the people are going to go short. Well, they’re saying, ‘I don’t know, this doesn’t look good because we just get up above that resistance.’

So the energy is sentiment, that dynamic of what traders are doing now is completely different. Then you’ll also get people who wait for which we call it the throwback and this is the throwback, goes up and retraces back down to that resistance level and then they’re going to be buying there. The rule of three basically means this, when the market goes to a price level ones, that sets the stage and that’s basically just planting a flag. Then number two, the second time, a little less likely because you’ve got a lot of traders who have mixed emotions about it. It’s also less likely to break through. Could depend on rumor news and gossip, all kinds of stuff, right? Economic, situation. But as far as pure technical analysis goes, and by the way you can’t, I got to be really clear about this.

Breakout Strategy Forex

This is really important. You can’t just depend on support, resistance and the rule of three by itself. In fact, there’s no one thing in trading. No one thing in trading that will make you profitable. What makes us profitable in trading is putting together a number of non-correlated variables and waiting for the multiple lines. Then you put this together with the other things that you used in your trading. So this would be another thing to add to your trading methodology. One more little piece of evidence if you will. So then as we break above it the third time, now, one will get above it. Again, sentiment has changed. We retrace, this is the third time that we’ve come to this price level and let’s make sure I get the right one. So that’s one, that’s two.

Now the third time is the most likely it is to go. In fact, you know what led me. So now I can make this more clear. So there’s the first time it reaches that price level there. The second time. Now the third time is key. This is a real decision point in this. In this case, we said yes, it went up and we said, why? If we did not get this gap, if the market just went up here, stopped and then held resistance, came down a little bit, odds are that market is not going to continue to go up outside of the market’s going to come down, and again, it’s mass psychology where people are saying, you know what, this whole time we’ve been watching this level and no, we could not get enough buyers after three times.

Forex Trading

It’s kind of like three strikes you’re out, but it’s really just a mentality of people saying the global markets have tried to break above this price level three times and the markets have not been willing to do it, meaning the people in the institutions trading it and therefore people just aren’t going to pay more. They’re not going to pay more for that. So now it becomes a bearish situation. Everyone’s sentiment switches to bearish, so that’s the rule of three, works really good. I encourage you to look for that pattern and added to your trading methodology.

Rubber Band Trade Strategy

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