The breakout method is a simple and easy to follow trading strategy using basic indicators. Best part is this system can work on any currency pair of your choice. The rules of this system are very easy and clear to follow. Remember the KISS principle when applying the strategy, do not try to over complicate it as it just defeats the purpose of having a system in the first place. I cannot stress this enough...the simpler it is the better you will trade.
I can tell you that if executed properly with minimum psychological conflicts, this stratehy will let you enjoy big gains in your trading cashflow.
NOTE: This system is best suited for trending currencies.
Step 1
Open a daily chart. For this example we will use Euro/Dollar pair.
Step 2
Add a 50 Simple Moving Average (SMA) on the chart as shown above. The observation made from the graph above is that price is trading below the 50SMA. That is the most important part of this trading system, to define the market trend.
The daily chart will provide you with an insight of the type of trades to take. If price was above 50SMA and 50SMA was pointing up with a positive gradient, you will take only long trades (buy). In the above case, price is clearly trading under 50SMA, which is pointing downwards. This gives you an overall idea to take short trades only (sell).
Step 3
Once the type of trade is determined, head to a 30-mins chart. That is where your entire trade signal is going to be triggered.
Step 4
Draw a trend-line from the lowest point where price last broke the 50SMA from downwards and connect line to the next highest lows which are trading above the 50SMA as shown in 30-mins chart above. This line will act as a support for price to bounce off.
Step-5
Remember that you are taking only short trades for this setup. Trade will be triggered only when price breaks through support line (Blue Line) as shown in graph below.
Now, there are two ways that you may enter the market:
1. If you are an aggressive trading, you may jump in the market at the open of the candlestick that follows the break of the blue trend-line. (You may need the confirmation of another indicator to support your claim)
2. If you are a conservative trader, you might draw a support line on the last price low shown on graph above as the gray line. Break of this support line provides extra confirmation for the trade, which is also trading under the 50SMA. The next step is for price too clearly open under the 50 SMA (Red Line) as shown above to take the trade.
If trend is strong, you can potentially make huge profit. In that instance you could potentially have made just over 300pips where risk was 70pips. This is on a standard account, means risking $700 to make $3000. Great risk to reward ratio of nearly 1:4.
With this strategy my stop-loss is usually between 50-70 pips and my profit target is between 150-300+pips depending on the volatility of the pair am trading.
Note: An indicator acting as a filter may be used for false breakout to minimize risk of taking a bad trade.
To your success,