First of all, I will like to wish those of you who are celebrating Chinese New Year a happy rabbit year ahead.
In today forex faq, I will be answering a question from our fellow trader and below is the question.
I have been trading off and on for over a year, but I am not consistent at winning. How do I spot a false breakout? And how do I know if a trend will follow through.
I believe that the problem of false breakout is one that frustrates most of us traders. However I am unable to talk about that here as it will be unfair for those of them who have purchased my forex trend line strategy book.
However I will like to tell you that there is no way you can totally eliminate false breakout, what I taught in the book can only help you to reduce your risk of entering a trade when there is a false breakout.
As for your second question on how to know if a trend will follow through, you can make use of the 200 EMA. Let says that you are in a downtrend; you should see the price forming candlesticks below the 200 EMA. If you see the price breaking above the 200 EMA, it is most probably the end of the trend. Personally, I love to draw the 200 EMA on all my chart as it provides a clear forex trend indicator for me.
Besides the 200 EMA, I will also make use of the Fibonacci retracement level to see if the trend will continue. On the most recent high and low, you can plot a Fibonacci level to see if the price retrace more than 61.8 percent. As long as it did not retrace more than 61.8 percent, the price is still in the trend. If it manages to retrace more than 61.8%, it is likely that the price is going to reverse.
The above 2 methods are just guideline on how I know that the trend is still continuing. However trading is still a game of probability and the random behavior of the market can something make us scratch our head? If you have anything to share with us, do feel free to give your comment below as it will be very valuable for everyone here in this community.