Case study – pullback breakout setup

The attached EURUSD 1h chart shows a good example of a failed reversal. Bar1 broke the rising trendline then after a small pullback a Bearish Engulfing line at Bar2 has provided a sell signal. A stop-entry order below the low of Bar2 would enter short on the third bar after Bar2. The price however failed to break below the swing low after the trendline break and reversed to extend the upside. A stop-loss order placed above the top of Bar2 has to be placed to provide protection.
Even though the trade in this example would have resulted a loss (I did’t take it as it happened during the Asian trading hours), it demonstrates well how a trendline break supposed to be traded.
Some traders prefer a more conservative approach where the short would be entered below the dotted line which marks the swing low after the trend breakout. I think that it would not lower the number of losing trades as much as it would offset the higher risk due to the bigger distance from the stop-loss level.

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