I am fairly new to Forex and I dabbled in it very briefly throughout this year but have only seriously considered it this week. I was going through the BabyPips School tutorial and I am up to the section on Chart Patterns. What interests me is that the author endorses setting a limit order each above and below a consolidation because one cannot predict the direction of the breakout trend but (obviously) can predict that a breakout trend will occur sometime in the future. I know it’s probably overly simplified, but it makes logical sense.
Is it really as simple as it sounds?
Could this method also be used to trade fundamental news releases? I noticed that price action tends to enter a very very tight consolidation a few hours prior to a major news release and there doesn’t seem to be much of a danger of accidentally hitting a limit order from a spike in those situations.
Straddling a tight consolidation range, with entry orders above and below the range, is a very appealing strategy, because you “know” that the price is going to break out of that range, one way or the other, eventually. Therefore, you “know” that at least one of your entry orders will be triggered.
But, there’s a trap here. You don’t know what will happen [B]after[/B] one of your entry orders is triggered.
Let’s consider a hypothetical example. Suppose you see that the GBP/USD has been in a narrow range for several hours. You expect a breakout, but you have no way of predicting the direction of the breakout. You straddle the range with an order to BUY 10 pips above the HIGH of the range, and an order to SELL 10 pips below the LOW of the range. You place stop-loss orders at prices which you consider to be appropriate.
Worst case scenario: the GBP/USD breaks out to the upside, triggering your BUY ENTRY order. Then it reverses, taking out your stop. It continues down below the LOW of the range, triggering your SELL ENTRY order. Then it reverses again, heading up, and taking out your second stop. You have just taken two losses, possibly in a very short period of time.
Finally, the GBP/USD picks a direction, and begins a large move away from its consolidation range. In other words, the price move you’ve been expecting has begun. Unfortunately, you’ve been whip-sawed into two losses, and now you are missing the price move you had hoped to capture.
This example is not an extreme one. This sort of whip-saw has happened, from time to time, to everyone who trades breakouts.
The up and down gyrations described above are usually referred to as price volatility, and this sort of volatility is very common around economic “news” releases.
Part of the reason for this is that, when a consolidation range forms ahead of a news release, everyone knows exactly [B]when[/B] the breakout will occur: it will occur when the news is released. Volatility often begins just prior to the news release, as some traders (knowing something in advance, or thinking they do) try to get the jump on everyone else.
When the news is released, its true importance may not be immediately understood; therefore, what looked like bullish news at first may be judged to be bearish a minute later.
Finally, there are major players who have access to order-flow information which you, as a small retail customer, don’t have.
Using this information, these major players can stop-hunt large clusters of entry orders, [B]and[/B] large clusters of stop-loss orders — and those clusters of orders most likely include your orders, as well.
So, is it futile to try to trade breakouts? No, of course not.
But, it’s not a gimme, either. To us — little retail customers — the forex market does not offer free lunches.
I’m talking about the whipsaw retracement. On a 5 minute timeframe, a whipsaw during a consolidation can happen in the blink of an eye, but because of the larger trading ranges on the higher timeframe, I assume the retracement won’t be as fast giving you time to cancel an existing order.
Price moves exactly the same in any time frame If there is a whip of 100 pips on a 5 min TF there will be the same on a 1 hour TF, Whipsaw happens in real time, Usually larger TF will have larger SL . the longer period candle may make it look less dramatic but the same movement occurs at the same time
[B]rebel[/B] is exactly right about price moves and time frames. If you don’t follow what he is saying, keep asking questions — because it’s important for you to grasp these concepts.