My Approach to Forex Trading #3 (Breakout trades)

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My Approach to Forex Trading: #3 (Breakout trades)

Those familiar with my blog here know that I tend to pretty much always stick with an overarching trading strategy centered around support and resistance levels. For binaries, that continues to be true. I have tried breakout strategies in the past for binary options, but I’m simply not very good at it to be perfectly honest. Some binary traders might be great at trading breakouts, and perhaps center their entire strategy around breakout trades. But each person is different and trading the exact same strategy as another trader may not work for you, no matter how hard you try to emulate what he or she may happen to be doing.

For forex trading, basing my trades around support and resistance – with rather heavy reliance on Fibonacci retracement levels – is still my main strategy. But every now and then, taking a breakout trade can actually be a good idea. The thing for me is that in forex, it really doesn’t matter how accurate you are in your trades. This is unlike trading strike-entry binary options, especially under something along the lines of a fixed-investment money management plan. In forex, what truly matters is your reward-to-risk ratio and how you manage your trades overall. If you’re aiming for a 2:1 reward-to-risk ratio on average – i.e., your take-profit margin is twice the size of your stop-loss margin when measuring from the price you entered your trade at – you only need to be correct on 33.3% of your trades just to break-even. Even being right on only 40% of your trades can reap a strong profit margin.

The point of the matter is that I can take breakout trades without worrying too much about whether it’s going to be right or wrong. If it’s wrong, I simply lose whatever I have stop-loss set at. If it’s right and the market is about to make new highs or lows that haven’t been seen in a very long time – or perhaps ever in the history of the currency pair – the possibility of profiting on such a circumstance can be enormous. Sometimes, these trades can be predicted using macroeconomic events, like when the USD/JPY steadily increased after the Bank of Japan announced the country’s quantitative easing efforts. That’s practically always synonymous with depreciation of a nation’s currency. Hence, the JPY lost value and the USD/JPY exchange rate increased.

Here’s an example of a recent breakout trade I took occurred on the EUR/JPY. The Fibonacci retracement levels I have drawn in span from 94.107-145.674 (currently), and from 88.940-169.960. The latter is a larger price movement stemming from a very large timeframe high and low from the years 2005 and 2000, respectively.

However, when the actual trade was taken, I had the 88.940-169.960 Fibonacci levels drawn in, but Fib levels drawn from 94.107-135.493. I took the trade at the end of the day on November 22, roughly at 136.400 when it became clear that the EUR/JPY was finally breaking out of the consolidation pattern that had formed resistance in the upper 135’s.

View from the weekly chart:

And unlike in the basic support and resistance trades that I make, I don’t use take-profit levels during breakout trades. The reason for this is that there is simply no clear price at which you can expect the pair to reverse. So I simply use trailing stops instead. Trailing stops are a tool in which you basically reset your initial stop-loss by placing it higher when the trade is going in your intended direction (in the case of buy orders).

My strategy for trailing stops is simple. I basically set it at some price beneath the previous day’s low. My initial stop-loss was placed at 134.800. This isn’t something I determined scientifically or in terms of some personal formula. I simply used a price back in the consolidation area while still giving my trade some wiggle room to develop (160 pips).

Once my trade finished at 138.711 on November 27, I moved my stop-loss up significantly to protect some of the profit. This is essentially a means of rewarding oneself for making a correct educated guess on the future direction of the market. The low of November 27 was 137.281. So I placed my trailing stop up at 137.250, a price just underneath. By doing so, I guaranteed myself that my minimum margin of victory on this trade would be 85 pips (excluding the spread, which is usually two pips or so).

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I did monitor this trade closely because the EUR/JPY was fast approaching the 38.2% Fibonacci retracement level from the 88.940-169.960 price range. This is a very large price range that literally encompasses decades’ worth of price movement on this currency pair. Hence, any Fibonacci level from this price range can be expected to have some type of influence on the market in terms of price congestion. The next day, price went above the 38.2% level and I adjusted my trailing-stop another 75 pips higher. But fortunately for the trade, price continued to stay above the 38.2% level and actually used it as a support level to consolidate and eventually continue to make new highs as more buyers entered the market.

View of the trade from current Fibonacci levels in place:

This trade cooperated very well until my trailing stop of 143.300 – set underneath the low of the December 27 candle – was triggered on January 2. This proved to be a good way to exit this trade as the EUR/JPY has been retreating from the late-December highs ever since.

Overall, this is one of my favorite trades so far in my forex career. Breakout trades come pretty infrequently when trading from the daily chart, but when they do they can be very rewarding. I walked away from this one with 690 pips of profit after holding the position for six weeks (although I always close trades over the weekend).

Opening Range Breakout Trading Strategy

Breakouts are one of the most common trading strategies. They involve identifying a key price level you expect the price to break through, and then buying or selling at that price in order to take advantage. Generally breakouts are used when the market is already near the extreme high or low of the recent past. When the market is trending and moving strongly in one direction, breakout trading ensures that you never miss the move.

One breakout strategy is the European Opening Range. This strategy typically focuses on EURUSD (Euro/U.S. Dollar), although it could be applied to any of the European majors.

While the Forex Market is open for 24-hours a day (Sunday evening through Friday evening ET), market activity in a given pair is not necessarily consistent throughout.

FX market is typically divided into 4 major sessions (times adjusted for Eastern Time):

Global Forex Market Hours

Trading the European Opening Range has three steps:

  1. First, you identify the high and low during the half hour just prior to the London open (2:30-3am ET).
  2. Look for a breakout of this range +/- 10 pips, or 1/10th of the daily Average True Range (ATR), to maintain above/below this level for 10-15 minutes. This is an attempt to detect a direction of the ‘flow’ for the remainder of the day.
  3. Finally, you attempt to manage this bullish or bearish bias by focusing on 1-, 2- or 5-minute charts and utilizing a combination of moving averages (13-sma, 144-ema & 169-ema) along with oscillators (RSI, Stochastics & CCI).

Other factors to include are major news announcements (usually in efforts of avoidance) as well as the time of day (when major markets open/close, option expirations, fixings, etc). If the Average True Range is achieved earlier in the week, the likelihood of it occurring twice in the same week is dramatically reduced. If this does occur, it’s typically in opposing directions.

As a currency trader, when volatility begins to pick up you usually want to be trading, not sitting on the sidelines. As a result, if this strategy has yet to achieve the Average True Range target on Monday, Tuesday or Wednesday of a particular week, then it may be sensible to pay close attention to this tactic on Thursday and Friday. Conversely, if the ATR is reached earlier in the week it may be prudent to be on the lookout for potential market failures in the latter half of the week as they could be the marking of a false break and/or possible outright reversal.

Noteworthy times to be aware of:

Ideally, if price is struggling near these events (typically spotted by a bullish/bearish divergence with an oscillator), then it might be prudent to reduce the position size ahead of time. This type of approach may help to minimize the emotional aspect to trading, since there’s an identifiable area to know where you’re wrong (the opposite side of the breakout’s high/low).

Here’s an example: EUR/USD (2 minute chart)

In the above example, EUR/USD made an important low during the 2:30-3:00am ET timeframe (which was preceded by an RSI bullish divergence with price) and shot higher shortly thereafter. EURUSD appeared comfortable above the 2-minute 144/169-EMA’s, while the 13-period SMA remained above the EMA’s, and RSI continued to find support into the key 40/45 zone. Consequently, there was no reason to divert from the intraday bullish bias.

As highlighted earlier, another factor to keep in mind is the time of day –in the FX market, most London traders tend to close their positions between 11:00 am and noon ET, while traders in New York close between 4-5pm ET. Accordingly, price will often see a final end-of-day push, followed by profit-taking (typically spotted by a bullish/bearish divergence with an oscillator) near these times of the day.

You’ll note that just after 11am ET EUR/USD pushed higher once again to finally reach the intraday Average True Range target of 1.2927, which was then followed by a bearish divergence with the RSI oscillator just ahead of 12pm ET.

3 Forex Trading Strategies For Serious Traders That Work!

Updated: November 21, 2020

If you’ve found yourself on this page – I am going to assume you’re very passionate about Forex trading and want to go places with it.

The sad truth is that there are a lot of potato strategies getting cooked up in bedrooms, and passed around on forums, branded the holy grail.

Everyone’s time is precious! There is nothing worse than wasting a lot of your time on a trading system that leads you down the wrong rabbit hole.

Time is a commodity that is non-refundable.

Don’t get me wrong – there is some golden information out there, but you need to have a bit of industry experience under your belt to be able to ‘filter’ what’s worth investing energy into.

The crazy amount of foreign exchange information that poor in when you do a google search can be an overwhelming, and dilute your ability to find reliable trading strategies to get you going.

You might already be trading Forex, but looking for simpler Forex trading strategies to supplement your current regime.

In this tutorial, I am going to share 3 strategies with you which are:

  • Forex Trading Indicator free, only need clean price charts
  • Require no ‘extra’ tools, just your charting software
  • Have a simple & effective price action approach
  • Reveal straight-froward, uncomplicated trade signals you can spot easily

When Forex strategies have these kinds of properties, they are easy to stick with for the long run (like a well designed diet).

Let’s put things into gear, and begin…

Forex Trading Strategies Using ‘Indecision Doji’ Candles As Breakout Trading Setups

This is one of the most overlooked and underestimated Forex trading strategies!

There are many definitions for a Doji candle – you can probably find over 10 variants! I am going to stick with the generic definition here, which I think works best.

The ‘ indecision’ Doji ‘ is the one I trade – it’s a very simple to understand signal, and extremely easy to spot on the charts too.

An indecision Doji candle has a small centered body, with wicks protruding out both ends of the body .

As the title suggests, this candlestick pattern represents indecision. The market is communicating to you that it tried to move higher, and it tried to move lower, but ultimately closed off back around the opening price.

The idea is to catch the breakout of the indecision. In general, we aim to catch bullish runs as price breaks the high, or bearish moves as the market breaks the low of the Doji.

Above: The basic way to trade these is to wait for a breakout from the ‘indecision’ the candle represents. We do this by catching price as it breaks above (buy), or below the candle range (sell).

There are also some more advanced tactics where we wait for a break of one end of the Doji, but only take action if it fakes out, reverses, and breaks the other end instead.

Doji candles print very frequently, and can be seen across a few time frames. Very easy also to spot with your eye!

Above: Yep, Doji candles form often, across all time frames.

One important thing to remember is that the more ‘data’ that you have packed into a candlestick pattern, the more reliable it will be.

Meaning: A Doji on the Daily time frame has magnitudes more value than a Doji on the 5 minute time frame – which is true for any price action Forex trading strategy.

In my crazy price action Forex tips article – I talk about how traders screw themselves over constantly by trading candlestick signals in isolation and give away my approach to a candlestick signal trading strategy decision.

So, the first lesson is: don’t trade every single Doji you see!

What is the difference between a good and a bad Doji signal?

We want to target them at points on the chart which have high technical value . Locations where you know the market has a ‘decision’ to make.

Looking for key locations like:

  • Proven support and resistance levels
  • Swing levels within a trend
  • Trend line structures
  • Any point on the chart your technical analysis tells you the market should ‘break or bounce’

Check out this Doji setup below…

Above: The indecision signal formed on a weekly support level – where we highly anticipate a ‘bounce’.

With that logic in mind – we only look for bullish breakouts

Above: As expected, a ‘bounce’ occurred off the major level, and price broke above the indecision high – kicking in our bullish trade order.

It’s all about using your technical analysis to find key areas where you know the price action has a ‘break or bounce’ decision to make. Wait for an Indecision Doji to form, then trade the expected outcome (usually bounces).

Above: With simple technical analysis – we easily spot a clear resistance level on the chart.

An indecision Doji candlestick pattern forms, so we look for bearish follow through off resistance (trading the bounce), and use the break of the Doji low as a trade trigger.

Above: The market follows through with the indecision breakout, and explodes downwards.

We can also use them in trending conditions to catch trend continuation.

T he best place to target Dojis in a trend is at swing levels (old support turned new resistance, or reverse of that).

Above: In a trending environment – look for indecision Dojis that form at swing levels. Target breaks in the direction of the trend.

Above: A nice result after trend momentum picked up via the swing point, broke the Doji high to trigger the trade, and continued to trend higher for days.

It is as simple as it is critical, that you perform good technical analysis first – then you can line up your Doji breakout idea to see if it fits.

Above: A glance at what separates a good indecision breakout opportunity from a bad one.

Remember, Dojis form very regularly – it’s your job to use your basic technical analysis to filter the bad from the good.

If you don’t have good chart reading skills, and can’t pick up the basic structure or context of the market – you might run into frequent trouble trying to trade these candlestick patterns…

When you apply this Forex strategy – just remember you will see a lot of Dojis printed, but only a small selection of them will be good trading opportunities.

Checkpoint

Some key points to remember

  • Do your technical analysis first before you consider the Doji as a trade opportunity. In most cases, simple price action analysis will rule it out as a viable trade
  • Match them up with important technical points on the chart, where you know the market has an important decision to make – then plan to trade the ‘break or bounce’ via the Doji breakout
  • Don’t be tempted to trade Dojis on low time frames – the less data in the candlestick, the less reliable the pattern.

The Flag Pattern – A Trend Continuation Strategy

In my opinion, flag breakouts are one of, if not the best Forex trading strategy for trending markets.

Because of the simple nature – flag breakouts are another overlooked gem, usually because Forex traders are always chasing the more complicated methodologies!

Like always, flag breaks work well on higher time frames – but I’ve even seen them work well on charts like 1 hour time frame!

Here is my ‘to the point’ breakdown of what flag patterns are, and how I trade them:

  1. A trending structure must be in place.
  2. A counter sloped, trend line develops against the existing dominant trend (the flag line)
  3. The flag line breaks in the direction of the trend
  4. Trade the ‘breakout candle’

Let’s look at an example.

Above: This is my text-book scenario for a bullish flag breakout. A strong trend in place, then shorter frequency lower highs develop against the trend – creating a counter-trend, trend-line.

We’re now waiting for the flag line to break, which signals trend continuation.

Above: A breakout signal! A bullish candle closes above the flag structure. We’re looking for a convincing close here, not a candle with a large upper wick.

Once we have the breakout candle, that’s our cue to get long. There are a few different entry, stop loss, and money management combination you can apply here.

I can’t cover them all here, I’ve dedicated a few modules to these subjects in our War Room Forex course.

The basic way is to buy/sell the breakout candle event (after it closes), and place a stop loss below the breakout candle.

If the breakout candle is really large, then other strategies need to be deployed to tighten the stop.

Above: The follow through move after a breakout candle busted the flag structure.

Hopefully you can see the value in this as a trend continuation strategy.

When the market is trending, these flags are actually forming all the time, right under your nose. If you haven’t been looking for them, then you’ve probably been overlooking many opportunities.

If you’re into the lower time frames (like 1 hour), open up your charts and check out what you’ve been missing…

Above: Even on a 1 hour chart, flag structures are actually worth looking out for.

You can see above during a strong trend, even the 1 hour chart produced the goods. The 1 hour chart is normally a difficult chart to apply swing trading strategies to, but flag breaks within trends just work so nicely.

Above: The power of catching flag breakouts within a trending environment. They key is to make sure the broader market is trending before you consider looking for flag trade opportunities.

You do see flags form within consolidation or in ranging cycles, but they just don’t offer the reliability, or reward potential. That’s why I only use them as a trend continuation trading strategy.

Checkpoint

The Rejection Candlestick Reversal Trading Strategy

The rejection candle is one of my most utilized candlestick pattern signals.

The anatomy and concept is similar to the classic ‘Pin Bar’ – which is the most engaged topic of interest in all the price action discussions, and communities online.

Rejection candles are a candlestick pattern that communicates denial of higher or lower prices . The market tries to move to an area, but it ‘rejected’ by the market.

This denial leaves a very distinct feature in the anatomy of the candlestick – a long lower or upper wick.

The better quality rejection candles pack thicker candle bodies (closing in the direction of the rejection).

Above: Simple anatomy diagram, comparing the classic pin bar to the more authoritative rejection candle pattern that I use.

Rejection candles have a thicker body. The ‘bounce’ from the rejection causes the closing price to be higher or lower than the open price.

The thicker body demonstrates more strength and authority as a reversal signal in the rejection candle anatomy.

What’s the #1 quality factor for rejection candles?

I am going to stay something stupidly simple here – the key is to match them up with technical areas on your chart, where you expect price to reverse.

Such a simple concept that many traders don’t use ! Most Forex traders out there will trade any and every rejection candle (or pin bar), that pops up on their chart.

I like to target these guys at:

  • Weekly support or resistance, the major turning points (counter-trend opportunities)
  • Swing points within a trend (trend continuation opportunities)
  • Range tops and bottoms
  • Very over extended prices (mean reversion opportunities)

Check out the bearish rejection setup below…

Above: A nice bearish rejection candle forming at a resistance level. Remember, rejection candles are a reversal signal – and strong resistance levels are an expected turning point. The signal matches the context!

Above: A very nice follow through move to the down side, after the bearish rejection sell signal printed.

Don’t fall into the trap of ‘trading every candlestick pattern’, just because they’re there. Get into the habit of doing technical analysis first, then build that analysis to the candlestick trade idea, for synergy and quality control.

Above: Simple technical analysis tells us this level is likely to cause the market to bounce, as old resistance holds as new support.

The bullish rejection is printed as a result of a bounce (at least the beginnings of one) – therefor it fits well with our technical analysis, and has a lot of synergy with what’s going with the chart.

Above: The technical analysis and the rejection signal both play out as expected, and become a profitable trade idea.

It’s just as simple as lining up the rejection candle (a reversal signal), which those likely reversal points on your chart.

Try to avoid trading rejection candles when there is a lot of congestion to the left.

Above: An example of not lining up technical analysis, context, or reversal points with your rejection candle signals.

These are dud signals because they hardly met any of the analytical quality control points we’ve talked about in this tutorial.

If you see heavy congestion to the left, and the rejection candle formed in the middle of it all – then that’s a red flag.

Also if you plan to go against the trend (which can be profitable), you better line up strong rejection candles with major reversal points (tip: get these from weekly time frame)

When you look back through your charts to evaluate these signals, take note: you will find them everywhere!

Be careful of confirmation bias – which means you only ‘see’ the profitable signals located at the tops and bottoms of moves in history, but you over look the signals in-between, which are the ones you would have likely been screwed over ‘in the trading moment’.

Rejection candles & pin bars are a fairly straight forward signal, but they are not the holy grail ATM machine that prints out everlasting money (which is how I’ve seen them promoted). They are only lucrative when combined with good technical, and price action analysis .

Checkpoint

Forex Traders – Make These Forex Trading Strategies Work For You

I’ve given you a lot of brain food here – ideas should be pouring out of your ears!

The most successful Forex trading strategies need to go beyond the charts. We need strong money management and a solid mindset to complete the recipe for long term survivability in the markets.

Obviously there are risk management techniques that need to be coupled to the strategies you’ve just be shown here. There are ‘risk mitigation’ strategies that I have modeled, and some other aggressive strategies.

But for simplicity sake: my goal is to always make sure that winners pay up way more than my losses – at least 3x more in fact. This positive risk reward ratio is the key to keeping your head above water, and eventually turning a profit over many trades!

There is a saying among experienced Forex traders: “Forex is simple, but it is not easy!”

What we’ve discussed here today is the simple technical side of trading, however, the true mastery comes from a trader’s mind-set, and is what makes him/her a winner in the end. That’s the insanely difficult part no one talks about.

To make these strategies work for you, you’re going to need to be disciplined, focused, and consistent with what you do in the markets. I recommend reading “Trading in the Zone” by Mark Douglas.

That book will give you a real good kick up the culo, and start to dramatically change how you think about your trading.

Did the strategies in this tutorial spark your passion? If so, feel free to look through my other Forex tutorials and videos here – there is a lot of helpful information for free on the site for you.

If you want to really get involved with how I trade, learn all my strategies, secrets, or even get a hold of my custom metatrader software (which does some crazy stuff) – then you’re welcome to check out my private War Room program for Traders.

It contains everything under the one membership to keep things simple – just the way I like my Forex.

So, these are my ‘getting started’ Forex trading strategies that work in today’s markets – which should be especially helpful to newbies.

I truly hope you got some value from this tutorial, and are ready to dig into your trading and try some of this stuff out.

If you liked the content, don’t forget to leave me your comment below.

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