Forex trading strategy “Breakout Pop and Stop”
We were all in a situation where the price is moving in a narrow range, and we expect a breakthrough in some direction. Our reasoning, quite logical, is that, after a breakout, the price usually moves in one direction, and we could make a good profit by capturing this movement as soon as possible.
However, it often happens unexpectedly, the price flies away from us like a rocket into the sky or falls to the ground. We’re looking at all this and thinking, “I missed a great move again!”
As a result, the temptation to persecute the price is defeated, and we jump into motion when it is in full swing. And then we watch the movement start to stop slowly and then turn around completely, leaving us with losses.
The desire to trade at a range breakthrough is quite natural. But for most traders, most of the time it just doesn’t work. The “Breakout Pop and Stop” strategy is an attempt to increase the security of trading by combining the price behavior with the candlestick reversal model.
In this picture we can see how the price breaks through the range boundary at the beginning of the trading session. We don’t know why we’re moving. Regardless of the reason, the price jumped (pop) out of range and then temporarily stopped (stop) before resuming upward movement. So the strategy is called Breakout Pop and Stop. The area is indicated by the first white circle.
We can see that two bull candlesticks are formed higher and bounce off a round number (grey dotted line). Usually, when the price moves in the same direction as a long, fast candlestick like these, we can expect some recovery back to the point where the price went out of range.
One way to use such a movement for trading would be to place a pending buy order just above the rebound candlestick. Stop-loss could be placed just below the tail of these candlesticks, or just below the maximum range.
The second white circle indicates another possible entry. A pinbar has been formed here, an important turning point candle at an important level. In this place, the monthly beer (dotted line) coincided with the local top of the previous growth before the fall.
This picture shows two possible inputs. The first input is indicated by a pinbar at a round level (dotted line), and an upward exit from the old range. Previously, the price fluctuated near the round level and began to form another range, based slightly above it.
The second round shows a long bull candle with the first signs that the price is beginning to stop: a significant wick at the top. The second candle in the circle, a bear, forms the pattern of Harami. When buying on the first signal, it would be a sign to take profit, exit the trade or at least move the stop-loss up.
Further decline is confirmed by a bear pinbar with a very long tail.
“Breakout Pop and Stop” is an interesting strategy for those who trade on a breakthrough range.
Basic rules of trading:
– This is a relatively dangerous strategy, as you expect to see sharp movements and filling in gaps. To reduce the risk, candle models of rebound and turning should be used to confirm movement.
– According to this strategy, it is better to trade after the news has caused a breakthrough in the narrow trading range.
– The session must be very liquid to ensure that there is enough support to continue the movement.
– Beware of upcoming news announcements, which can quickly completely change the market sentiment.
Range breakthroughs that allow you to trade on this strategy occur mainly at the opening of currency market sessions: New York and London – the main examples. Forex analytics helps to determine the possible direction of the breakthrough.