Two Effective And Simple Forex Strategies

Here are two simple forex strategies that get us into a trade right when the price is about to turn. By getting in when the price is likely to turn, we maximize our profit potential, and also keep risk low since we can get out very quickly if the price keeps moving against us. Therefore, these strategies provide trades with excellent reward-to-risk ratios, where we can expect to make more on winning trades than we lose on losing trades.

Simple Forex Strategies – False Breakout For Ranges or Chart Patterns

A range is when a forex pair is moving sideways between a high point and low point. To consider it a range, the price should have moved into the high price area at least twice and the low price area at least twice. We need at least two high points and two low points to connect a trendline between them, highlighting the range or rectangle. The highs and lows don’t need to be the exact same price, but they should be quite close. Here is an example of a short-term range that developed in the USDJPY.

The price moves down, bounces up, moves down to a similar low and then rebounds to a similar high. The price then drops a third time, moving below the prior lows (lower horizontal line) but doesn’t keep dropping…instead it rallies again. This is called a “false breakout”. The price dropped out of the range, which many traders interpret as a sign the price will continue lower. Sometimes it does continue lower, but quite often a false breakout occurs, which is when the price moves right back into the range.

False breakouts are a powerful strategy mainly because so many traders are only interested in breakouts. In the above range, many traders would have been waiting to jump into a short trade (sell) as soon as the price dropped out of the range. But if the price doesn’t keep dropping that means all those traders who went short will be in a losing trade if the price starts rising, and are forced to buy to cover their position, pushing the price up even higher.

Instead of trading breakouts when they occur, false-breakout-traders wait for the times when the price moves slightly outside a range, but then moves back into it. The idea is that if the price can’t keep moving in the breakout direction, it will likely head back in the other direction.

In the example above, the price dropped out of the range but then stalled right away. All those price bars hovering just below the bottom of the range showed there wasn’t a lot of selling pressure. This situation presents a trading opportunity.

When a pattern like this occurs we know we will want to buy if the price starts rallying back into the prior range, but we need a signal that tells us when to get in. I like to use engulfing patterns or consolidation breakouts. In this case, we would let the price drop below range…we do nothing on the breakout. If the price stalls out right away, like it did here, we then wait for a bullish engulfing pattern. This is when an up candle totally envelops a prior down candle. That is one possible entry.

Another entry is to wait and see if a consolidation develops. A consolidation is at least three price bars that move sideways. In the example, a three-bar consolidation develops just below the range. We buy if the price moves above the high of the consolidation. Take whatever entry occurs first. In this case, there was no bullish engulfing pattern, so the consolidation breakout is used, triggering us into a long trade when the price rallies above the consolidation high.