Trade Setups That Don't Work For Me: Continuation Breakouts

I started journaling my trades in EdgeWonk to document my entry decisions. This allows me to figure out what works for me and what doesn't. However, this isn't the only benefit of EdgeWonk. 

In this platform, I have the opportunity to assign a strategy or setup to each trade entry that I make. While my stats are largely preliminary for the time being, I have noticed that my continuation breakout trades have been largely unsuccessful. This probably ties into the fact that it violates the "buy low and sell high" philosophy. If price has already run up, why buy when it's even higher? In other words, buying when it has broken a previous high.

This might work better in futures or equities trading since there is an inherent upwards directional bias. This isn't so much the case for FX due to the fact that currencies move in relation to one another. Here's an example of why I'm no longer a fan of trading breakout continuation patterns.

AUDCAD 1-Day

As we discuss this trade, it's important to note that I did not have any of the information to the right of the blue line. Since I'm reviewing this trade several days after it has been closed out, my analysis and entry criteria were all based on the left side of the chart. For the sake of clarity, I won't go too in-depth on the exact price parameters. The next chart, a 4-Hour, will be annotated with the necessary arrows depicting my entry and stop out.

Regarding the daily structure, AUDCAD is in this major uptrend. Specifically, it has been in an uptrend since late-March. I'd figure it'd be crazy to short into this uptrend simply because price stalled at the 0.9633 level.

At the time that I was watching this pair, price has made its fourth touch at this level. Despite hitting resistance, I was bullish because of what happened after the third touch that occurred at the end of August. After that third touch, price sold off to a higher low than the previous at 0.9433. Since price stalled at the fourth touch rather than sold off sharply, I considered that we likely won't see much further downside.

This is where I entered a buy trade:

AUDCAD 4-Hour

I don't really rely on classifying these levels as either support or resistance. Ever since I've gotten more exposure to trading futures, I'd like to think that I'm plotting levels that visually represent points of control. How price reacts to these levels provides order flow context. Here's my take:

• Over on the 4-Hour time frame, price continued to make higher lows. The point at which I entered was a higher low following an even weaker selloff.
  
  
• Previously, price never stayed at the 0.9633 level for long. In this situation, price traded above that level, retraced below it, and held there. I figured that there was selling pressure, which would soon be exhausted given that higher low candle formation.
  

This entry may seem a bit questionable. You might be wondering why I didn't wait for a clean breakout and then enter when price retraced back to this level and tested it as support. I believe the answer is simple. By waiting for confirmation, I'm reducing my R-multiple because any unclean pullback to this level would require me to set a wider stop loss.

Even waiting for a breakout to occur, I've never had much success trading the continuation. I don't believe that this is a setup that I'll pursue in the future. Reflecting on what I could've done differently, I consider two possibilities that are both more optimal than taking a long position.

Option #1: Sit Out Completely

Like I said myself, price has been in an uptrend since March. The traders that want to buy have already bought so I would essentially be buying months after the majority of volume has been filled. Even if price broke through the 0.9633 level, how much higher would it go? Not much higher, probabilistically speaking.

Option #2: Sell

As price briefly traded above this level and then fell below it, this met the criteria for another setup. Specifically, this would be my fakeout (false breakout) setup. In this setup, I look for opportunities when price fails to hold at a level that it breached. the main reason I didn't enter was because this false breakout wasn't very clean. This wasn't visually noticeable on the daily time frame.

In this particular situation, a fakeout setup would have a lower probability of success. However, I should've realized that this would provide me with an even higher R-multiple, meaning that it would be sustainable in the long run.

Verdict:

Upon further evaluation, sitting out completely would've been the most optimal route to take. Taking a short position could also work. I could've further managed risk by reducing the position size of a sell trade.