“Simplicity is the ultimate sophistication”
– Leonardo Da Vinci.
Although Leo wasn’t talking about breakout trading, he sure could have been!
One of the most effective methods for catching bigger moves is to apply breakout trading to a pair which is trending. The process is very simple and the results are very rewarding.
We simply look for a trend on a higher time frame, the drop down onto the lower time frames to find periods of consolidation with defined highs and lows with a view to trading a break of the consolidation in the direction of the higher time frame trend.
We can see here on the Daily time frame that price is clearly trending down in line with On Balance Volume trending downward.
So now we have our higher time frame trend identified we drop down onto the lower time frames to pick out some tradeable consolidation.
On the H1 chart we can see price forming defined support lines holding with two touches before the support lines break down in line with Order Flow Indicators giving us the opportunity to enter short trades and join the higher time frame trend. We can see that On Balance Volume is moving downward in line with the higher time frame and that Order Book Regression stays below it’s midline whilst Psychology confirms the break out trades by crossing downward from it’s midline.
The lower time frame breakout trades offer great risk reward as they present the opportunity to trade in the direction of the overall trend whilst keeping risk tight.
They can be used to establish initial positions or to add to longer term positions already in play.
Support & Resistance
The other option we have is to trade using support & resistance levels to align ourselves with the overall trend.
For example, in a bearish trend, we look for periods of consolidation to form and then trade short from the interim double tops these ranges form. This is a slightly more aggressive strategy but again the risk is tight and the rewards are very healthy indeed. The best way to trade these levels is to wait for a candle close to signal rejection of the level instead of just trading the level strike
So taking the H1 example from above, lets look at it in the context of seeking to trade short from resistance levels in line with the long term bear trend.
We can see that in each instance price tests the resistance line formed from the consolidation high before rejecting the line and closing lower, thus giving us an entry signal.
Our Forex Trading Course contains some great material on trading both breakouts and support and resistance, but we thought we’d give you just a quick taster here to demonstrate the profitabillity of these methods. Our advanced section of the course has some fantastic strategies combining advanced Order Flow methods with breakout & support/resistance trading.