Why Many Traders Lose Their Profits Soon After Winning

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Why 99% of traders lose money

lets discuss here why most of people lose some money.

I have the opinion, that the most trades lose money, bcs the have no plan to win.
lets look to all trading book, the most of discussions, everywhere are stated out, that you should not risk mor then x% of your money. That i will agree, you have to do risk managment. But the most important thing is, no one have a winning plan.

Lets say in this way, a lot of people say, let the winners run. this is maybe a point, but not a plan. Nearly nobody want to start a business without a business plan. I know, there are some projects on kistarter or some internet startup in the past where this was working. But in general, 99% of trders have a job. Most of them are not self employed. Most of them following a business plan from the managment.

In trading, you are your own manager. You have to make your own plan. A businees plan is always a plan. Noone of them will be fullfilled in time, relly nowone. This is like the 5 year plan from Russia in past communist years. No plan was fullfilled. But this isnt the question in my opinion. The mean thing is, you have to have plan. A plan should have goals. This goals must be hard to arrive, but not be impossibe.

Let me stay out, the most of the hedge funds make 10 till 100% a year. The funds with 100% you can count on one hand.

What is a goal? Is a goal to find daily profit? when yes, how much daily profit?
What comes after daily profit? whats happen if you pass the daily profit?

I think, a plan have to include more then one goal like

  1. daily profit
  2. weekly profit
  3. monthly profit
  4. yearly proft
  5. 2 years profit
  6. 3 years profit
  7. 5 years profit

and this goals have to be monitored regulary on daily, weekly, monthly, yearly base.

Why i think you should have to do this?
looks to the daily profit, yes you can pass it, also 4 days a week, but you can reach your weekly target.
you can pass your weekly target 3 weeks a month and you can reach the montly target,
even you can continue this.

but in general, you should arrive your target. f you cant arrive it continiusly, you maybe have to adopt it.
if you pass a target, looks to the next higher one and look if you can reach it. if the next higher one is impossible, adopt your targets.

Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake

W hy do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker’s trading platforms. In this article , we look at the biggest mistake that forex traders make, and a way to trade appropriately .

Why Does the Average Forex Trader Lose Money?

The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult.

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We looked at over 43 million real trades placed on a major FX broker’s trading servers from Q2, 2020 – Q1, 2020 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain.

Percent of All Trades Closed Out at a Gain and Loss per Currency Pair

Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2020 to 3/31/2020.

The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2020 through Q1, 2020 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time.

If traders were right more than half of the time, why did most lose money?

Average Profit/Loss per Winning and Losing Trades per Currency Pair

Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2020 to 3/31/2020.

The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades .

Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades.

What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution.

Cut Losses, Let Profits Run – Why is this So Difficult to Do?

In our study we saw that traders were very good at identifying profitable trading opportunities–closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run.

When your trade goes against you, close it out . Take the small loss and then try again later , if appropriate. It is better to take a small loss early than a big loss later.

If a trade is in your favor, let it run . It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains.

But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology.

A Simple Wager – Understanding Human Behavior Towards Winning and Losing

What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?

50% chance to Win 1000

50% chance to Win 0

Expect to win $500 over time

Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.

50% chance to Lose 1000

50% chance to Lose 0

Expect to lose $500 over time

In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time.

Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why?

Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory

Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards.

The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains .

It feels “good enough” to make $450 versus $500 , but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around.

This doesn’t make any sense from a trading perspective—50 0 dollars lost are equivalent to 50 0 dollars gained; one is not worth more than the other. Why should we then act so differently?

Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure

Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success.

Avoid the Common Pitfall

Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely?

When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book.

Typically, this is called a “ reward/risk ratio ”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio.

If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades.

What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio . That way, if you are right only half the time, you will at least break even.

Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series.

Stick to Your Plan: Use Stops and Limits

Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning .

This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor).

Managing your risk in this way is a part of what many traders call “ money management ” . Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading.

Does Using 1:1 Reward to Risk Really Work?

Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it.

Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent.

Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference.

Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2020 to 3/31/2020.

Game Plan: What Strategy Can I Use?

Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher

Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account.

The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away.

We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders.

*Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2020 to 3/31/2020.

Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide , we help you identify your trading style and create your own trading plan.

View the next articles in the Traits of Successful Series:

Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

10 Ways to Avoid Losing Money in Forex

The global forex market is the largest financial market in the world and the potential to reap profits in the arena entices foreign-exchange traders of all levels: from greenhorns just learning about financial markets to well-seasoned professionals with years of trading experience. Because access to the market is easy—with round-the-clock sessions, significant leverage, and relatively low costs—many forex traders quickly enter the market, but then quickly exit after experiencing losses and setbacks. Here are 10 tips to help aspiring traders avoid losing money and stay in the game in the competitive world of forex trading.

Do Your Homework

Just because forex is easy to get into doesn’t mean due diligence should be avoided. Learning about forex is integral to a trader’s success. While the majority of trading knowledge comes from live trading and experience, a trader should learn everything about the forex markets, including the geopolitical and economic factors that affect a trader’s preferred currencies.

Key Takeaways

  • In order to avoid losing money in foreign exchange, do your homework and look for a reputable broker.
  • Use a practice account before you go live and be sure to keep analysis techniques to a minimum in order for them to be effective.
  • It’s important to use proper money management techniques and to start small when you go live.
  • Control the amount of leverage and keep a trading journal.
  • Be sure to understand the tax implications and treat your trading as a business.

Homework is an ongoing effort as traders need to be prepared to adapt to changing market conditions, regulations, and world events. Part of this research process involves developing a trading plan—a systematic method for screening and evaluating investments, determining the amount of risk that is or should be taken, and formulating short-term and long-term investment objectives.

How Do You Make Money Trading Money?

Find a Reputable Broker

The forex industry has much less oversight than other markets, so it is possible to end up doing business with a less-than-reputable forex broker. Due to concerns about the safety of deposits and the overall integrity of a broker, forex traders should only open an account with a firm that is a member of the National Futures Association (NFA) and is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a futures commission merchant. Each country outside the United States has its own regulatory body with which legitimate forex brokers should be registered.

Traders should also research each broker’s account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies. A helpful customer service representative should have the information and will be able to answer any questions regarding the firm’s services and policies.

Use a Practice Account

Nearly all trading platforms come with a practice account, sometimes called a simulated account or demo account, which allow traders to place hypothetical trades without a funded account. Perhaps the most important benefit of a practice account is that it allows a trader to become adept at order-entry techniques.

Few things are as damaging to a trading account (and a trader’s confidence) as pushing the wrong button when opening or exiting a position. It is not uncommon, for example, for a new trader to accidentally add to a losing position instead of closing the trade. Multiple errors in order entry can lead to large, unprotected losing trades. Aside from the devastating financial implications, making trading mistakes is incredibly stressful. Practice makes perfect: Experiment with order entries before placing real money on the line.

$6 trillion

The average daily amount of trading in the global forex market.

Keep Charts Clean

Once a forex trader opens an account, it may be tempting to take advantage of all the technical analysis tools offered by the trading platform. While many of these indicators are well-suited to the forex markets, it is important to remember to keep analysis techniques to a minimum in order for them to be effective. Using multiples of the same types of indicators, such as two volatility indicators or two oscillators, for example, can become redundant and can even give opposing signals. This should be avoided.

Any analysis technique that is not regularly used to enhance trading performance should be removed from the chart. In addition to the tools that are applied to the chart, pay attention to the overall look of the workspace. The chosen colors, fonts, and types of price bars (line, candle bar, range bar, etc.) should create an easy-to-read-and-interpret chart, allowing the trader to respond more effectively to changing market conditions.

Protect Your Trading Account

While there is much focus on making money in forex trading, it is important to learn how to avoid losing money. Proper money management techniques are an integral part of the process. Many veteran traders would agree that one can enter a position at any price and still make money—it’s how one gets out of the trade that matters.

Part of this is knowing when to accept your losses and move on. Always using a protective stop loss—a strategy designed to protect existing gains or thwart further losses by means of a stop-loss order or limit order—is an effective way to make sure that losses remain reasonable. Traders can also consider using a maximum daily loss amount beyond which all positions would be closed and no new trades initiated until the next trading session.

While traders should have plans to limit losses, it is equally essential to protect profits. Money management techniques such as utilizing trailing stops (a stop order that can be set at a defined percentage away from a security’s current market price) can help preserve winnings while still giving a trade room to grow.

Start Small When Going Live

Once a trader has done their homework, spent time with a practice account, and has a trading plan in place, it may be time to go live—that is, start trading with real money at stake. No amount of practice trading can exactly simulate real trading. As such, it is vital to start small when going live.

Factors like emotions and slippage (the difference between the expected price of a trade and the price at which the trade is actually executed) cannot be fully understood and accounted for until trading live. Additionally, a trading plan that performed like a champ in backtesting results or practice trading could, in reality, fail miserably when applied to a live market. By starting small, a trader can evaluate their trading plan and emotions, and gain more practice in executing precise order entries—without risking the entire trading account in the process.

Use Reasonable Leverage

Forex trading is unique in the amount of leverage that is afforded to its participants. One reason forex appeals to active traders is the opportunity to make potentially large profits with a very small investment—sometimes as little as $50. Properly used, leverage does provide the potential for growth. But leverage can just as easily amplify losses.

A trader can control the amount of leverage used by basing position size on the account balance. For example, if a trader has $10,000 in a forex account, a $100,000 position (one standard lot) would utilize 10:1 leverage. While the trader could open a much larger position if they were to maximize leverage, a smaller position will limit risk.

Keep Good Records

A trading journal is an effective way to learn from both losses and successes in forex trading. Keeping a record of trading activity containing dates, instruments, profits, losses, and, perhaps most important, the trader’s own performance and emotions can be incredibly beneficial to growing as a successful trader. When periodically reviewed, a trading journal provides important feedback that makes learning possible. Einstein once said that “insanity is doing the same thing over and over and expecting different results.” Without a trading journal and good record keeping, traders are likely to continue making the same mistakes, minimizing their chances of becoming profitable and successful traders.

Know Tax Impact and Treatment

It is important to understand the tax implications and treatment of forex trading activity in order to be prepared at tax time. Consulting with a qualified accountant or tax specialist can help avoid any surprises and can help individuals take advantage of various tax laws, such as marked-to-market accounting (recording the value of an asset to reflect its current market levels).

Since tax laws change regularly, it is prudent to develop a relationship with a trusted and reliable professional who can guide and manage all tax-related matters.

Treat Trading as a Business

It is essential to treat forex trading as a business and to remember that individual wins and losses don’t matter in the short run. It is how the trading business performs over time that is important. As such, traders should try to avoid becoming overly emotional about either wins or losses, and treat each as just another day at the office.

As with any business, forex trading incurs expenses, losses, taxes, risk, and uncertainty. Also, just as small businesses rarely become successful overnight, neither do most forex traders. Planning, setting realistic goals, staying organized, and learning from both successes and failures will help ensure a long, successful career as a forex trader.

The Bottom Line

The worldwide forex market is attractive to many traders because of the low account requirements, round-the-clock trading, and access to high amounts of leverage. When approached as a business, forex trading can be profitable and rewarding, but reaching a level of success is extremely challenging and can take a long time. Traders can improve their odds by taking steps to avoid losses: doing research, not over-leveraging positions, using sound money management techniques, and approaching forex trading as a business.

Why Breakout Traders Usually Lose Money

Breakout traders make up a significant portion of the overall forex market, breakout trading is very popular among traders in financial markets not just forex and is one of the oldest trading methods taught online and in books. Unfortunately as with lots of trading literature found online there are many myths around breakout trading which are simply not true.

Now breakout trading can be profitable during certain market conditions and I just want to say before we get into this article today that I’m not saying all breakout traders lose money, as with any strategy in forex trading people have got to find what works for them, if you trade breakouts and are successful in doing so then that’s fine, there’s absolutely no reason for you to read this article, however if you have not been successful trading breakouts then this article will maybe shed some light as to why the results have not been that great for you.

Where Do Breakouts Occur ?

Breakout traders are looking to trade in the direction of a movement AFTER it’s already begun.

The whole premise of breakout trading revolves around the idea that if the market breaks a level deemed significant by the breakout trader it has a higher chance of continuing in the same direction of which the break occurred.

Breakout traders will monitor many different types of levels in the market for places where they suspect a breakout will occur, the way they will enter into a breakout trade is usually by pending orders placed at these levels before the beak has occurred, I believe some people do enter the market using market orders as well when the market reaches the breakout point but I think overall the majority use pending orders.

One of the main places they tend to watch for breaks is support and resistance levels.

This resistance level on USD/JPY will have been identified by breakout traders as a place where a breakout is likely to happen.

They would mark the level on their charts and placed their pending orders accordingly, if you look to the far right of the image you’ll see I’ve put an arrow above one of the candlesticks

The reason why this candle is important is down to the fact that this is the candle where the actual breakout took place, when this candle closed above the resistance many breakout traders will have been entered into long positions either by the pending orders they had placed at the level or by using market orders when they saw the breakout occur.

You can see not long after the breakout occurred the market started to advance higher.

Another significant place they’ll usually be monitoring are recent swing highs and lows.

All the lines I’ve marked in the image above are places where breakout traders will have placed trades anticipating a breakout, notice how when the market breaks past these ‘levels’ there is usually some sort of movement in the opposite direction soon after, this happens for a reason which I will explain later but for now just familiarize yourself with what these level look like on your chart

Why Breakout Traders Lose Money

What I’m going to show you now is how breakout traders lose money in the markets.

This is why there tend to be retest at support and resistance levels in the market, it’s commonly accepted the reason the market returns to these levels is to give traders who missed the initial breakout another chance to get into the market, this is not the case, the main reason the market returns to these levels is to purposely make the breakout traders lose money and close their trades.
The bank traders want the breakout traders to close their trades because they want to place their own traders into the market.

In this example the bank traders want to place buy trades, so they need sell orders to come into the market to accomplish this. A large portion of these sell order will come from the breakout traders who went long closing their trades at a loss which results in them using a sell order.is down to them wanting to be able to place their own trades.

Now the market stops moving higher after the breakout occurs due to bank traders taking profits.
When the pending orders of the breakout trades get hit, there’s a huge influx of buy orders in the market, this is exactly what the bank traders want.
By the time the market has broken the highs the bank traders are already in significant profits on their trades and will be looking for a way to take some profits o the market, the only way they can do this is if they have fresh buy orders come into the market.

Why do these order come from ?

The breakout traders!

The buy orders from the breakout traders placing trades gives the bank traders the opportunity to take profits on their trades.

The three arrows I’ve put above the candles in the image signify where the bank traders are taking profits, you can see small wicks on each one of these candles, these wicks are showing you where the bank traders are taking profits, retail traders do not sell when they see the market moving up, so this selling must be caused by the bank traders.

Once all the buy orders from the breakout traders have been consumed by their sell orders from the bank traders taking profits off their trades the market begins to move lower.

This movement lower indirectly has the effect of causing the breakout traders to begin closing their trades as their profits start decreasing and their fear of losing money begins to take over whilst also causing some reversal traders to believe the market is going to continue going down in the direction of the trend, which causes them to also begin placing sell trades.
So far we have established that when the market moves down after a breakout two sets of traders start selling:
The breakout traders closing trades because their scared of not making any money.

And reversal traders who think the down move is going to continue.
Now with both sets of these traders selling it means the majority of the orders coming into the market will be sells, what do you think the bank traders are likely to do with all these sell orders.
Bank traders still see the potential to make even more money, they can easily place their buy trades due to the massive amount of sell orders now present in the market whilst also knowing where their profits are going to come from (the reversal traders).

When the down move is over and the market starts moving up again the reversal traders are the ones who are now under pressure to close their trades, they start to see their small profits disappear and out of fear close their trades, essentially handing their money over to the bank traders who were buying when the market was moving lower.

The example above is not a one-off case.

This process of making breakout trades lose money happens again and again in the market, it’s virtually identical for all places where breakouts occur in the market, I could have easily taken any random chart and found a place where breakout happened and you would see the same process described taking place.

False Breakouts

Another way breakout traders typically tend to lose money is when false breakout occurs in the market.

These are very common in the forex market and are one of the primary techniques used by bank traders to sucker in unsuspecting breakout traders into taking an incorrect trade.

False breakouts usually happen when the banks have not been able to place their entire trade into the market and need more buy or sell orders to complete the position, using their money they will purposely make the market break a high or low which they already know breakout traders are watching, with the idea that most of them will either have pending orders already at the level anticipating a breakout or will place trade using a market order when they see the market break the level.

AUD/USD Daily Chart

The image above shows two really important things happening in the market, you can see I’ve labelled 1. and 2. on the image.

I’m going to start off by explaining whats happening at point 1.

At point 1. you can see there was a resistance level in place which at that point had been touched three times, meaning everybody in the market who has any kind of basic knowledge of support and resistance would have know for a fact that this was indeed a confirmed resistance level.

Breakout traders also know this, they’ll be anticipating a break higher due to them see that prior to this consolidation the market had made a swift up move.

The bullish candlestick below the 1. labelled on the image is the point at which the breakout traders identify a breakout taking place, many of these traders will of automatically been entered into long positions due to their pending buy orders placed at this resistance being hit, whilst many of them will have entered into the breakout using market orders.

With the resistance now broken, a lot of traders believe the market is set to continue moving higher, this doesn’t happen, instead we get a bearish candle which nearly manages to engulf the bullish candle seen immediately after the breakout, if you had access to a 2 day chart seeing these two candlesticks next to each other would make a pin bar.

This bearish candle seen after the breakout is the result of the bank traders selling into the mass of buying that took place when the breakout occurred, like I’ve mentioned before bank traders DO NOT place trades onto candles in which they want the market to go, if they want the market to go down they will not place trades onto bearish candles, it will always be done on the opposite candle, in this situation its the bullish breakout candle their selling into.

The next candle we see is a very large bearish candle, most of this candle is formed from people who placed buy trades when they saw the market breakout from the resistance level, these traders are now losing money, the pain threshold they have in their head as the maximum their willing to lose has been reached so a mass of selling begins to take place from them closing their trades.

You may remember at the beginning of this article I also said breakout traders tend to put their stops at recent swing lows and swing highs, in the image you’ll notice I’ve marked two swing lows with arrows, these swing lows are where the breakout traders will have put their stop losses, when the market hits the stops it will result in even more sell orders coming into the market.

Filling More Orders

Moving on I want to talk to you now about the point I’ve labelled 2. on the image.

The reason I’ve marked this point on the chart is to show you another example of how bank traders place even more trades into the market. (in this example it happens to be sell trades)

Looking at the candle with the arrow pointing to it you can see it has a wick on it which stops just at the point where the market broke the support level, the reason why it come back to this broken support is down to the fact that the bank traders want to place more sell trades onto the down move.

When the market breaks this support level breakout traders enter sell trades with the expectation of the market moving lower, initially this is what happens, the next candle turns out to be bearish and the market falls a bit lower, this lures the breakout traders into a false sense of security, they believe they have gotten themselves into a good trade, so they begin doing things like moving their stops closer to entry and taking profits.

On the next candle the market suddenly begins a small up move which ends with a candle with a wick on it, most of the breakout traders who sold when the market broke this support level will close their trades when they see this, to be in profit one day yet to see most of that mental profit (because they hadn’t actually made it yet) begin to vanish the next day causes these trades to close their trades out of fear of not making any money on the trade.

As we know to close their trade means they will have to use a buy order, buy orders allow the bank traders to place sell trades which is what ends up producing the wick on the candle.

If you look at the daily chart of USD/JPY on the 11th of December you’ll see another instance of this happening.


Breakout trading is really a method which looks good on the surface but is typically really bad in execution, it can be easy to be led astray when coming across strategies like this, the lure of quick profits entices people to believe that the method is a good one, unfortunately if you fail to understand how the market really operates then its quite difficult to know the differences between a good trading method and a bad one.

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