Trading Breakouts

Trading the currency market successfully is an extremely challenging endeavour that requires focus, consistency, discipline, and a thorough understanding of market structure. Many traders focus on predicting market movement and direction by use of Fibonacci tools, pivot zones, finding tops and bottoms etc. Others react to market movement by trading breakouts.

For over 5 years I have employed both predictive and reactive methods of trading and have found that trading breakouts gives me a definite edge. However, trading breakouts is no easy feat as whipsaws, false breakouts and large stop losses can lead to ruin. Also, extraordinary patience is required because a trader could wait for hours and days for the right setup. This is further compounded by the fact that trading breakouts oftentimes forces us to buy new highs and sell new lows which most people simply can’t do. All that been said, I believe that trading breakouts has a definite advantage over other forms of trading.

The distinct advantage to trading breakouts is that we are forced to trade with the immediate and dominant trend, and this trend is identified and confirmed prior to entering any trades. We don’t have to predict anything! The market tells us where it wants to go, this is confirmed and we enter the trade with confidence. We allow the market to speak to us!

Not all breakouts are the same. How do we differentiate a true breakout from a false breakout? How do we know if a breakout has sufficient force behind it to move price to our profit target? This has been the subject of intense research for 5 years. My research shows that the market requires excess volume, liquidity and momentum to ensure a follow-through after a breakout. Unfortunately, unlike markets such as futures, stocks etc., the forex market does not have a defined opening time and lacks accurate volume data as there is no centralized exchange or dedicated level II quotes mechanisms. This led to the development of my proprietary indicator that quantifies and qualifies volume, liquidity and momentum in the forex market. I also came to appreciate probably the simplest but most important trading statement mentioned several times by some of the world’s greatest traders... “Never trade a breakout, unless it follows a false breakout.” The first breakout defines the trend; the second breakout confirms the trend. If you are a breakout trader, this simple statement if employed efficiently and effectively can significantly improve your trading results.

The purpose of this blog is to record and share my breakout trades. All trades are placed in the direction of the dominant market flow (a confluence of market flow between daily, 4 hour and 1 hour timeframes). This is confirmed by my proprietary indicator. I will be trading the breakouts of 3 range periods:

a. The previous day’s high/low

b. The opening range of the London and New York opening sessions

c. The inside bar

All trades will be placed on the 1 hour chart with the primary focus on the GBPUSD. Of course, I will be scanning all the majors for breakout opportunities.

In the next post, I will provide a brief overview of my trading plan that is used to complete a top-down analysis at the start of each trading day. I welcome your comments.