Breakout-Retest Strategy implemented for shorting GBP/USD
The forex strategy that I use primarily is based on chart patterns and candlestick formations. The process begins with identifying support and resistance levels and determining the overall trend direction from the H4 (4-hour) chart. Subsequently, this analysis is refined on the H1 (1-hour) and M30 (30-minute) charts to gain a more comprehensive view of market dynamics. The reason behind this multi-timeframe approach is to ensure that we have a clear understanding of the critical price levels and trend dynamics. Relying solely on a single timeframe, such as the M30 chart, can be limiting as it may not reveal the full extent of significant resistance areas or the broader trend context.
The central element of this strategy involves marking and monitoring trendline breakouts, while also considering support and resistance levels. We need to start by drawing trendlines on either the H1 or M30 chart, depending on the timeframe that provides the most clarity for the particular trade setup. Once the trendline is established, we need to patiently wait for the price to break this trendline.
It's essential to distinguish between a genuine breakout and a false breakout (fakeout). A price may momentarily break the trendline but then quickly revert within it. To confirm a legitimate breakout, we need to use a specific criterion i.e. the candle that breaks the trendline must close outside of it. Moreover, the subsequent candle should close above the highest price point of the previous candle that initially broke the trendline. This confirmation ensures a stronger indication of a sustained move in the breakout direction. Once a valid trendline breakout is confirmed, a horizontal line is marked at the breakout level (1.27393). This acknowledges the tendency for prices to retest back to the breakout zone before continuing their move in the breakout direction. This retesting phase is an important component of this strategy.
However, it is important to note that a trade is not executed immediately during a retest. Entry signals are confirmed by closely observing the M5 and M1 charts. As the price approaches the breakout zone, it typically forms higher highs and higher lows (in the case of an upward breakout) or lower highs and lower lows (in the case of a downward breakout). To initiate a trade, we need to look for a reversal pattern on the M1/M5 chart. In the trade above, the price has broken the upward trendline at the price level of 1.27393. Then based on the M5 chart, it can be seen that the price is retesting to the breakout level above and forming higher highs and higher lows (HH-HL). We need to wait until the price touches the breakout line and breaks the HH-HL pattern by forming a lower high. At 1.27309, price made a high lower than the previous high after retesting and touching the breakout level. This indicates a reversal and a confirmation for entry. The MACD indicator with 12-26-9 settings is used to mark the highs and lows more accurately in the M5 chart. The green histogram bars indicate bullish momentum and red histogram bars indicate bearish momentum. This is an important indicator for this strategy as marking the highs and lows accurately is crucial to identify the reversal.
The trade was entered at 1.27236 upon confirmation of the LH and reversal in M5 chart (after touching the breakout level):
In this strategy, a crucial aspect is the use of a 1 to 1 reward-to-risk ratio, and it typically involves aiming for a take profit (TP) and stop loss (SL) of 50 pips each. These TP and SL levels are established with careful consideration of the support and resistance zones identified during the initial analysis in higher timeframes. The importance of these zones lies in their ability to impact trade placement. For instance, when opening a buy trade, if there's a significant resistance level above, whether identified on the H4, H1, or M30 timeframe charts, it's essential to set the TP below that resistance level. This approach is taken because price movements often encounter rejection at such resistance levels, making it crucial to secure profits before reaching that level. By following this TP and SL levels, the trade hit TP with a profit of 50 pips.
The central element of this strategy involves marking and monitoring trendline breakouts, while also considering support and resistance levels. We need to start by drawing trendlines on either the H1 or M30 chart, depending on the timeframe that provides the most clarity for the particular trade setup. Once the trendline is established, we need to patiently wait for the price to break this trendline.
It's essential to distinguish between a genuine breakout and a false breakout (fakeout). A price may momentarily break the trendline but then quickly revert within it. To confirm a legitimate breakout, we need to use a specific criterion i.e. the candle that breaks the trendline must close outside of it. Moreover, the subsequent candle should close above the highest price point of the previous candle that initially broke the trendline. This confirmation ensures a stronger indication of a sustained move in the breakout direction. Once a valid trendline breakout is confirmed, a horizontal line is marked at the breakout level (1.27393). This acknowledges the tendency for prices to retest back to the breakout zone before continuing their move in the breakout direction. This retesting phase is an important component of this strategy.
However, it is important to note that a trade is not executed immediately during a retest. Entry signals are confirmed by closely observing the M5 and M1 charts. As the price approaches the breakout zone, it typically forms higher highs and higher lows (in the case of an upward breakout) or lower highs and lower lows (in the case of a downward breakout). To initiate a trade, we need to look for a reversal pattern on the M1/M5 chart. In the trade above, the price has broken the upward trendline at the price level of 1.27393. Then based on the M5 chart, it can be seen that the price is retesting to the breakout level above and forming higher highs and higher lows (HH-HL). We need to wait until the price touches the breakout line and breaks the HH-HL pattern by forming a lower high. At 1.27309, price made a high lower than the previous high after retesting and touching the breakout level. This indicates a reversal and a confirmation for entry. The MACD indicator with 12-26-9 settings is used to mark the highs and lows more accurately in the M5 chart. The green histogram bars indicate bullish momentum and red histogram bars indicate bearish momentum. This is an important indicator for this strategy as marking the highs and lows accurately is crucial to identify the reversal.
The trade was entered at 1.27236 upon confirmation of the LH and reversal in M5 chart (after touching the breakout level):
In this strategy, a crucial aspect is the use of a 1 to 1 reward-to-risk ratio, and it typically involves aiming for a take profit (TP) and stop loss (SL) of 50 pips each. These TP and SL levels are established with careful consideration of the support and resistance zones identified during the initial analysis in higher timeframes. The importance of these zones lies in their ability to impact trade placement. For instance, when opening a buy trade, if there's a significant resistance level above, whether identified on the H4, H1, or M30 timeframe charts, it's essential to set the TP below that resistance level. This approach is taken because price movements often encounter rejection at such resistance levels, making it crucial to secure profits before reaching that level. By following this TP and SL levels, the trade hit TP with a profit of 50 pips.