BreakOut Trading Strategy (Pt 2)

Breakout trading has been tried many times over the years by thousands of successful and not so successful traders. This system is very simple yet many traders fail to seize the opportunities abound in it due to negligence and impatience. Switching from one time frame to another doesn’t change the strategy, it’s still the same. Many even use multiple time frame breakouts, like 5min, 15min 30min, 1 hr chart etc or use weekly breakouts and daily breakouts of highs and lows. However, there is only one issue with Breakout Trading Strategy. This is to determine when the breakout will occur.

I refer to this trading strategy as “A Simple Way For Building Long Term Wealth” because there is no correlation in the market between the complexity of an indicator or method and its success. In fact, the opposite is true; most of the world’s top traders who have made consistent profits have used systems that are essentially simple. Simple systems are the best because their logic is easy to understand and implement. If the system is easy to understand it is easier for a trader to execute it with discipline. There is no point in having a system unless you have confidence in it to trade with discipline, even when faced by a losing set of trades.

There are some trades that are more valid than others and the probabilities of the breakout turning into a strong trend are greater. We need to look at some basic criteria for evaluating breakouts in terms of their probability of success.

1. Generally, the more times a line of resistance or support are tested the more important the violation will be if breakout occurs. We generally never trade less than three tests. What I am trying to say is; you need a minimum of two or three relatively equal highs and lows to have a true consolidating base.

2. The time frame between the tests of resistance and support is also important likewise the longer the support or resistance has been in place, the more valid the break will be when it comes.

Trading breakouts is a great method for catching big moves that can pile up big profits - that is the aim of all traders. Every trader could use a breakout system if they wanted to; the fact is they don’t, for reasons stated earlier. The fact that the bulk of traders don’t want to is the fundamental reason why they work and will continue to make mega profits for those of us that understand the simple concept.

Once a clear break has occurred, the odds are the trend will continue in the direction of the break. If the trend reverses quickly, and goes back to the breakout point rather than continuing, the break is likely to be false. Stops should therefore be at or near the breakout point but if you have what is displayed on the chat below, it is a clear breakout that can make u more profits.

Look for opportunity when the price or market is consolidating and the more the consolidation the more the volatility/breakout. Also locate Double Top (two or more candlesticks that traded the same high) and Double Bottom (two or more candlesticks that traded the same low). Therefore, that will serve as the tunnel and you will be watching for the candlestick that will break any of the lines and make your decision as fast as possible. Then insert EMA (200) as the trendline, EMA (8) as the fast and signal line, while EMA (20) is to confirm the breakout.

ENTRY RULE:

Once the price breaks through one of the trend lines and a current price bar closes outside the tunnel – place a buy/sell position in the direction of the breakout. If price penetrate the trend line, but did not close outside the tunnel, cancel the previous trend line and draw another one according to the new conditions.

EXIT RULES:

You could set 50 – 70 pips but I will advise you to automatically trail your profits by setting 5 or 10 pips below or above the trendline and apply Trailing Stop of 15 or 25 points. However, it is believed/speculated that the price after breaking the tunnel will travel the distance more than the width of that tunnel.

Keep making more profits while I keep researching for more Money Making Trading Strategies!!!

Till then, keep on keeping those PIPs

Hassan Ismail,

MD/CEO Income Legends Concepts