Second Time Is Sometimes the Charm
05/06/2014 9:00 am EST
Breakout trading is often associated with quick decision-making and fast-paced entries and exits, but it doesn’t have to be that way. Oftentimes there are opportunities to get into a breakout trade well after the initial break. On top of that, there can be opportunities to enter into a breakout trade at a better price than what was originally presented. Today, we will discuss how to take advantage of missed breakout opportunities.
The Recent GBP/USD Breakout
The long-term GBP/USD price chart is a prime example of a major breakout. We recently witnessed “cable” breaking to a multi-year high followed by a near-50 pip rally to breakout traders’ delight. If you were one of those breakout traders that participated, congrats. It was a good trade and I am happy it worked out for you. For the others who missed the break, don’t sweat it. These breakouts sometimes yield an opportunity to get in well after the initial break. Let’s take a look.
Trading the Breakout Pullback
In order to qualify as a breakout, price must break through a support or resistance level. But after this break occurs, price sometimes will pull back to the support/resistance level that was originally broken. The old saying, “What once was support, can later become resistance (and vice versa)” applies to this situation. Price can bounce off this level and produce a trading opportunity.
In the case for the current GBP/USD breakout, we’ve seen exactly this. Two days after the initial break, price has returned to its prior resistance level, giving us a buying opportunity. Our trade idea is based on the idea that this resistance level will now act as support. This scenario can be seen in the image below.
GBP/USD Pulling Back to Support After Breaking to a Multi-Year High
So the initial break of the resistance area occurred last Wednesday, followed by another bullish blue candle. On Friday, GBP/USD fell heavily back towards the resistance area, which now could act as support. This gives a buying opportunity (marked with a highlighted circle on the chart above) that actually gives us a better price to enter than the original breakout candle’s closing price.
Breakout Pullback Exit Plan
To exit this trade, we recommend using a 1:2 risk:reward ratio with a stop loss below the support/resistance area (around 1.6770) and a limit at least twice as far (around 1.6990). This will put our stop beyond the next closest support level and our limit underneath the psychological 1.7000 level. These orders should both reduce our risk and maximize our potential return from the trade. If you would like to explore other ways to exit this trade, check out my 3 Simple Forex Exit Strategies.
Second Time’s a Charm
So next time we see a break out that we missed, know that it’s not a big deal. If we can be patient and wait for a pullback to the original support/resistance level, we can still get into the trade and possibly get in at a better price than what was originally available.
By Rob Pasche, Trading Instructor, DailyFX.com