We saw a lot of those so-called “fake breakouts” in GBPUSD during the last two weeks. On January 3rd, the pair fell to 1.2199, only a pip below the previous swing low of 1.2200, but just enough to activate a lot of sell orders. Unfortunately, the bears gave up right away, allowing the bulls to lift the pair to as high as 1.2431 as of January 5th. This upside move exceeded the last swing high of 1.2387, but long positions opened there led to nothing more than another disappointment, because soon after that GBPUSD started plunging to 1.21066 as of today. This is exactly we do not use this “breakout” strategy, because fake breakouts are actually a normal thing. That is why we prefer using the Elliott Wave Principle to anticipate them. Here is how this works.(some of the marks have been removed for this article)
The chart above was included in the premium GBPUSD issue we sent to clients before the markets opened on January 2nd. As visible, while the pair was trading near 1.2323, Elliott Wave analysis suggested we should expect a small decline in wave 5 of (a), followed by a three-wave recovery in wave (b). After that, the bears were supposed to wake up again in wave (c). Seven trading days later, it is now time to see how the updated chart of GBPUSD looks.
So, the first fake breakout – the one to 1.2199 – was wave 5 of (a). The second one – up to 1.2431 – was nothing more than the natural three-wave retracement, which follows every five-wave impulse. And the rest of the price action – the current plunge to 1.2106 – is a consequence of the 5-3 or (a)-(b) wave cycle pointing south. There was no need to look for someone to blame and your broker did not manipulate the market, in order to take your money away. The market just did what it usually does – follow the Elliott Wave rules. Want to be ahead of fake breakouts in the Forex market? Learn about Elliott Wave.
