The ‘Breakout-Goodbye Kiss’ Trade Strategy

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Breakout Trading Strategies

Trading breakouts is not a new concept; traders have been using breakouts for centuriesToday many of the world’s top traders trade breakouts for big prots. So what actually is a breakout?

A breakout is the point at which the market price breaks away, or moves out of a trading range . The trading range can be for any length of time but once prices exceeds the high or low of the range, a breakout has occurred.

The accepted market wisdom is “buy low sell high” and this has been taught to us in high school and is the accepted philosophy of many of the world’s investment community, from economists to brokerage houses. The theory sounds ne, but it is very difcult to make money trading this way. The logic of breakouts is

contradictory to this accepted market wisdom and works on the premise: That in order to make money you should “buy high and sell higher” in a bull market, and “sell low buy back lower” in a bear market.

So why is the traditional investment wisdom of “buy low sell high” so difcult to make money in the real world of trading? For this we need to take a closer look at price action and the attitude of the majority of investors.

Why Breakouts Increase Protability & Decrease Your Risk

Perhaps the most famous traders in the history of trading were the “Turtles”. The turtles emerged from a meeting between Richard Dennis and Bill Eckhardt about whether great traders were born or made. Bill felt that he could teach people to become successful traders. Richard felt that successful trading was down to genetics. In order to settle the debate, it was decided to advertise for

trading apprentices and then try and teach them to become successful traders. The

students were called the “Turtles” when Dennis explained the concept by saying they were “going to grow traders like they do turtles in Singapore” They were the most successful trading experiment in history, earning an average compound rate of return of over 80%. It was proved that with a simple set of rules complete novices, with no experience, could become successful traders. The rules used were simple and included the use of breakouts in the methodology taught. While only one component of the

overall plan, the breakout methodology was very important part of how the traders actually got into and held the big trends for maximum prot.

In the book “Market Wizards”, there is a very good interview with Bill Eckhardt and his analysis on what made the Turtles so successful. He illustrates the point further that traders, in their desire to “buy low sell high”, create risk for themselves. By doing what is conventional and comfortable for them actually means they end up missing the biggest trends, and creating a greater risk for themselves, by lowering their probability of entering at the right time and making an overall prot.

Breakouts Make Your Money Work Harder

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Another important reason for using breakouts, rather than buying low or retracements ,

is that trading capital is utilised better. It is the aim of all traders to lock into and hold trends. The fact is, however, that markets spend most of their time in trading ranges going nowhere. Many markets don’t trend for months or even years. A trader who takes a trade in the anticipation that it will move, may have to wait a long time to see the trade move his way, if it does at all. This can tie up capital for long periods that could be utilised more productively elsewhere. The big advantage of breakout trading is you are only entering a trend in motion. As we all know, a trend in motion is more likely to continue than reverse. This is a basic premise that technical analysis is based upon, and

breakouts get you in, as the trend emerges, and has a high probability of continuing. You therefore know you are only entering markets that have a high probability of trending strongly and making you big prots.

Breakout Forex strategies

The Retest Breakout Trading System

Many breakout traders also use opportunities when the price breaks-out of any type of trading pattern. This can be a triangle, a head-and-shoulders pattern, a flag, a box channel as well as the more common support and resistance levels.

This type of style seems counter-intuitive to a fundamental trader. A fundamentalist’s goal is to buy below fair value, and sell above. The idea of buying as the price makes new highs, or selling as it reaches new lows, as breakout trading does, goes against this viewpoint. Despite this, technicals are influential in the near-term and breakout strategies that exploit them can be highly profitable.

The appeal of breakout trading is clear It is easy to grasp and is a quick win strategy that can lead to high profits. The largest profits in any market usually lie in the first few bars of a newly forming trend – this is where the strongest price acceleration is. Explosive breakouts often take place after volatility squeezes (see below). The breakout trader aims to be in at the beginning of these powerful trends.

Breakout events are extremely common in Forex charts. They also occur across different time frames. Nevertheless, having a good grasp of technical analysis is necessary to identify which of these are worth trading and which are best avoided. Technical indicators allow the breakout trader to judge how robust a given channel is and if a break attempt is likely to be successful or not.

Most breakout traders use a combination of other inputs to form their decision. However, in the end, it often comes down to experience and gut instinct. The occurrence of false breaks also makes timing decisions difficult.

How to Avoid False Breaks

Those who try this strategy soon learn that false breaks are its “Achilles’ Heel”. According to most estimates, at least fifty percent of Forex chart breakouts are “false breaks” or “fake outs”. With a false break, the price breaks out of a range temporarily, only to pull back again shortly afterwards.

This is frustrating to the breakout trader, and several runs in succession can wipe out hard won profits. Even more maddening is when you exit the breakout trade on a retracement, only for the price to double back again in the breakout direction. These kinds of retracements are what thwart the breakout traders strategy.

Wait for the retest To counter these situations some breakout traders wait for the previous level to retest before entering the trade. They wait until the price reverses and retests the boundary at least once. They then only enter the trade if the retest succeeds (or fails if you are a range trader), and the price bounces back. This is shown in Figure 2.

A successful re-test on the downside suggests the previous resistance has become a new support. Conversely, a successful re-test on the upside suggests the previous support has become a new resistance. Stop losses are placed so that the position is closed if the price moves through the boundary, back into the range a second time. This is not a guarantee. It does though increase the odds of catching real breaks rather than a fake.

This is because the second move suggests there is genuine momentum driven by real supply or demand. Using it means the trader enters breaks that have a higher probability of success. On the downside, it does mean capturing less of the move because of the delay on commitment to trade.

It is always good practice to check key support and resistance levels by looking at the chart in several time frames. Fibonacci extensions/retracement can help in deciding your entry and exit points after these key levels are identified. Using additional signals that confirm direction at a support/resistance also provide an advantage.

Why Are “False Breaks” So Common?

There are two reasons why false breaks happen so often.

Range traders Firstly, there are more range traders than there are breakout traders. These traders believe that the most likely course is that the price remains within the established range. Range traders see the break as an anomaly. They need to see a significant break from an established channel before they will consider it permanently breached. Given this, range traders are likely to trade against the breakout. They become faders.

Dealers The second reason is dealer manipulation. Dealers may look to stir-up a quiet market and stimulate volatility. A dealer can estimate from order flow, that there probably is not enough interest to break out of a range. Even so, they may test weaknesses in the trading channel by pushing their quote.

They do this especially when they’re axed, or have a need to trade in a certain direction to reduce their net position. This may cause some breakout traders to enter prematurely.

As a result, other breakout traders may do the same as they see a newly forming trend, which will build momentum. More often than not though there is no real follow up. The gap closes and the price re-enters the range trapping those caught on the wrong side.

Range traders also tend to trade against these types of moves, which adds to the strength of price pullback into the original channel.

Fading

Given the high failure rate of breaks, some traders believe it more profitable to trade against these events. That is, to trade in the opposite direction to the breakout move. This is called fading. There are some who say that most faders are converted breakout traders who have given up and resorted to reversing their strategy. Caught out too many times by false breaks, these traders believe the reverse strategy to be the more profitable one.

Using Volume Indicators

People often say that the main drawback with breakout trading in Forex markets is that there are no reliable real-time volume indicators. In my view this issue is a bit overblown. If you have ever traded “on exchange” products, you might have seen the flow of orders, which is sometimes made available for traders to see as part of the exchanges’ commitment to transparency.

This allows you to watch in real-time the orders flowing through the exchange. From the order flow, a trader can determine the supply and demand and watch for any liquidity gaps. A gap in liquidity can cause high volatility without a clear price direction.

This is a major problem for breakout traders because liquidity gaps are where many failed breaks occur. However this mostly happens when trading relatively illiquid markets such equities.

Knowing the variations in daily trading volume will help you to avoid false breaks on predictable light volume and session handovers.

When trading most major currency pairs, the kinds of liquidity gaps which you see with equities for example, just don’t happen. In Forex there are always periods of light and heavy order flows as the major markets open and close. However volume is relative.

For example, EUR/USD puts through around $1 billion dollars notional volume per minute on an average day, whereas even EUR/JPY puts through around $100 million per minute.

Momentum trades The main challenge of the Forex breakout trader is to identify if a break has momentum behind it, or if it is just dealers pushing the quote around to try to stimulate activity. Some brokers will provide their own volume data as part of a market data feed. If so, this can be valuable input. There are also proxy volume indicators, such as on MetaTrader that can be useful.

Keep in mind the time of day and the pair you are trading. Familiarize yourself with the regular daily fluctuations in volatility. Regular variations happen because of the opening, closing and overlap of the regional trading sessions. Knowing these variations will help you to avoid false breaks on predictable light volume and session handovers.

Use Staggered Entries

Using multiple trade entries is always good practice with this style. When trading breakouts it is especially important due to the high probability of price reversals. A system of staggered entries, also called a grid system can work in your favor.

With a grid, you can create your orders in such a way that you divide your risk over a number of smaller trades. This is safer than committing to one big all-or-nothing trade. With this strategy, you build up the position as you gain more confidence in the reliability of the breakout. This is shown in Figure 3.

With a grid, depending on your chosen setup, you can also profit either from a straight through move, or from a whipsaw-move, that crosses all levels.

A grid also helps to enforce your trade management, making it less subjective by presetting appropriate stops and take profits. A separate article on Forexop covers grid trading in more detail (see here).

Volatility Squeezes

If you look at volatility data for any market over a period, you will notice it often runs in cycles. High volatility phases often come after periods of low and declining volatility. A narrowing of the Bollinger bandwidth identifies these events easily. Due to this, the Bollinger bandwidth is an important technical input to this strategy especially when automated.

Bollinger squeezes or volatility squeezes often happen just before powerful breakout events. This is why it is important to know them and identify them. They can provide you with the most profitable breakout trades.

A lowering of volatility causes a contraction of the bandwidth. The chart above shows type of event. Squeezes often happen prior to news releases and announcements. They can also happen during trading session handovers. This is because traders in the open session pause to assess the sentiment of the major markets such as London or New York as they come into play.

False breaks do still happen here. These are especially common after important news events. A separate article on trading economic news explains the reasons for this.

How to Use Breakout Trading

  • Breakouts occur when the market moves rapidly in a single direction. They happen at all time frames.
  • They often appear after volatility squeezes – so identifying these events is important.
  • News releases or the collapse of a technical pattern can be the trigger.
  • Use a system of multiple, smaller trades and build the position as confidence in the breakout is established. Or use a straddle strategy.
  • Check the price action preceding the trading range to establish likely new support or resistance levels.
  • Use the “retest method” to reduce entries into false breaks, and trade longer time frames to avoid “market noise”.

If you want to try breakout trading, the following resources may be of help:

I’m looking to get my Forex Breakout Direction Indicator listed on your site

Thanks for the excellent article. I learned a lot about Breakout trading.

Simple and Profitable Strategy for Trading Breakouts

In the following article, I will describe a complete strategy for trading breakouts. This includes:

  • Definition of “Breakout”
  • Examples
  • What Really Happens in a “Breakout”?
  • Currencies to Trade
  • Time Frames to Trade
  • Sessions to Trade
  • Find a Level for Possible Breakout
  • Good Setup
  • Trade Entry
  • Stop-Loss and Take-Profit Levels
  • Summary / Key Points

Many charts, with real setups and trade examples, are also included. These examples help explain the Breakout Trading Strategy and reinforce different points we’ll discuss. I hope you find this strategy helpful for your trading.
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Definition of “Breakout”

“Breakout” is price movement through a barrier. The barrier can be a support or resistance level, a trend line, channel, triangle etc. Any technical level or price area, that holds price from moving higher or lower through it, is a barrier. The Breakout occurs when price finally moves through the barrier.
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Let’s look at some recent examples. The first example is on EUR/USD 4 Hour Chart. The barrier lies in the area 1.3030-1.3050 (red rectangle). We can clearly see how this area acted as resistance, holding price several times from moving higher (red arrows). The Breakout is marked with a filled green arrow. Price broke through this barrier and continued to move higher.

The next example is on EUR/AUD 4 Hour Chart. The barrier is the Simple Moving Average, 50 periods (red line). This technical indicator acted as resistance, holding price below it (red arrows). The Breakout is marked with a filled green arrow. Price broke through this barrier and continued much higher.

The third chart is USD/CHF 1 Day. Here we actually see two breakout examples. The barrier is around 0.9380 (horizontal marked area). This area first acted as resistance (first two red arrows, from left). The first Breakout is marked with a filled green arrow. Price broke through on 28.02 and moved higher.

Then, the same 0.9380 area acted as support. It held price from going lower on 14.03 and 22.03 (green arrows). The second Breakout is marked with a filled red arrow. Price broke through on 04.04 and moved lower.

What Really Happens in a Breakout?

Let’s take for example a support barrier. When price first reaches the support barrier, it cannot move through it lower. The reason is that there are buyers at that level. They are buying the currency at the barrier price and support it from dropping lower. As long as the buyers have bigger positions and orders than sellers, they will restrain price from moving lower.

When Breakout occurs, the sellers have gained the upper hand. Their orders are bigger than the buyers’ positions and orders. If sellers are much stronger than buyers, price will move swiftly through the support barrier. This is the Breakout. Price will trigger the buyers’ stop losses. They are forced to cover their losses and liquidate their positions. In addition, usually new sellers will join and put in more sell orders. This will increase the selling pressure further and move the price even lower.
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► Currencies to Trade

The Breakout Trading Strategy works on all currencies. You can trade it on any currencies you want. I personally like to trade the Majors and some Crosses.
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► Time Frames to Trade

Best time frames for trading this strategy are the 1 Day and 4 Hour.

As seen in the examples above, the strategy works well on 1 Day and 4 Hour time frames. Barriers on these time frames usually hold firm at first tests. Finally, when price breaks through them, there is usually some significant continuation in the direction of the break.

On higher time frames, like 1 Week and 1 Month, barriers are even stronger. However, there are much fewer opportunities to trade in the same time span.

On the other hand, on lower time frames, like 1 Hour and 15 Minute, there are much more opportunities to trade. However, price will not respect barriers so well. There are many more false breakouts. Price will seem to break a barrier and then suddenly reverse back, without continuation in the direction of the break.
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► Sessions to Trade

Best sessions for trading this strategy are the London Session and the New York Session. There is usually good price movement at these times. We are interested in a significant price movement, after the breakout. So, it’s just logical to trade at times that the market is very active.
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► Find a Level for Possible Breakout

The first step in implementing this strategy is finding a good level (=barrier) to watch for a possible breakout:

  • On the 1 Day chart, the level should have held price for at least two weeks.
  • On the 4 Hour chart, the level should have held price for at least 3 days.
  • In both the 1 Day and 4 Hour time frames, the level should be tested at least three times before breakout.
  • The longer a level holds and, even more importantly, the more it was tested – the better. The best breakouts happen after the barrier held many tests for a long period of time.

In the following EUR/USD 1 Day example, the level (red rectangle) is defined by three tests (red arrows) over a period of about two and a half months (red arrows during the period 13.09-1.12)

► Good Setup

A good setup has the following characteristics:

  • The barrier held price for a long period (at least 2 weeks on the 1 Day or 3 days on 4 Hour – see above)
  • The barrier was tested many times (at least 3 times – see above)
  • Price moves swiftly to test the barrier for the final time before the Breakout. Here is a zoom-in of the previous example:

The black rectangle defines the last test of the barrier, before the Breakout. We see that almost all candles are of the same green color. Most candles are of medium or big size; there are only two small candles.

  • Price isn’t rejected at barrier level. It simply goes through it easily. For example, let’s compare price action at the last test followed by Breakout (red rectangle) to that of previous tests (black rectangles). In the previous tests, price bounced back down. In the last test, price remains in the barrier area after the test, and then breaks out nicely.
  • The Breakout Candle is a big, full bodied candle, or with a very small wick on the side of the break. This signals a powerful move, clearing all positions and orders that previously held the barrier (see “What Really Happens at Breakout?” above). Here it’s marked with a green arrow:
  • Some more candles follow the Breakout Candle, in the same direction. We want to see some more continuation, as price gains momentum in the direction of the break. Here is a good example, on EUR/AUD 4 Hour. The continuation is marked with a rectangle:
  • After price reaches some new barrier, it slides back to the breakout area. The candles of this pullback are much smaller than the Breakout Candle. There are more candles in the corrective pullback move, than on the impulsive Breakout move. The pullback move appears inside a black rectangle:

Enter the trade when a pullback candle touches the Breakout level but does not violate it. For example, if the barrier was a resistance level, it should now act as support. So, the candle must close at the Breakout level, or above it. It must not close below it. Enter long, at the close of that candle.

For example, in the following EUR/USD 4 Hour example, the trader buys at the close of the candle marked with a black arrow. The candle was the first candle to touch the Breakout area (red rectangle). It closed above that area, so it’s a good entry.

► Stop-Loss and Take-Profit Levels

Stop Loss is placed 10 pips below the Breakout area, at 1.3020. It’s marked with a red line:

First Take Profit is the newest barrier. This is the area that price reached after the Breakout, before pulling back. In our example, it’s the recent high at 1.3120, marked with a green line:

When price reaches this Take Profit, exit half of your position. Move your Stop Loss (1.3020) to Break-Even (1.3053). Change Take Profit to the next barrier. In this example, it’s the next resistance level.
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Summary / Key Points

Here is a short Summary / Key Points of the Breakout Trading Strategy:

  • Trading breakouts is a simple and very powerful strategy.
  • Understanding the order flow at Breakout is important.
  • Reading price action – before, during and after Breakout – helps us trade only good setups.
  • Precise Entry, Stop-Loss and Take Profits levels maximize our profitability.

Breakout trading strategy Kalbo Breakout

The breakout trading strategy of Kalbo Breakout is simple but effective enough to trade on the signal bar during the London session.

В breakdown trading strategy Kalbo Breakout work is carried out on the basis of the signal bar during the London session in the direction of the trend. A discussion of the strategy is conducted on the forexfactory.com portal this topic.

Input parameters

  • Currency pairs: any.
  • Timeframe: H
  • Bidding Time: London.
  • Risk management: after calculating the stop loss, choose this lot volumeso that the risk is no more than 2-5% of the deposit per transaction.

Price Chart Setup

  1. Unpack the archive.
  2. Copy the template to the templates folder.
  3. Copy the indicators to the MQL4 -> indicators folder.
  4. We restart the terminal.
  5. Open the chart of the desired currency pair.
  6. Install the template named Kalbo Breakout.

The graph should look like this:

Kalbo Breakout Trading Strategy Template

Preliminary analysis of currency pairs

First, we select the appropriate Currency Pairs. To do this, we use the FFX Strength Meter indicator – MACD (12,26,9) (panel in the lower right corner), which is calculated on the basis of H4 TF data.

The currency pair selection algorithm

  1. Choose the strongest currencies.
  2. Choose the weakest currencies.
  3. Based on the strong and weak currencies, we compose currency pairs and trade in the direction of a strong currency.

Signals indicating the opening of a long position (purchase)

  1. The price is above black moving average.
  2. A blue bar appeared on the histogram below the price chart.
  3. A blue up arrow has appeared.

Long Trade Example

Signals indicating the opening of a short position (sale)

  1. The price is below the black moving average.
  2. A pink bar appeared on the histogram.
  3. A pink down arrow appeared.

Short Transaction Example

Installation options for stop loss and take profit

  • Under the signal bar (that bar, at the close of which a position was opened).
  • By the level of the nearest local minimum / maximum.
  • By level of support / resistance.

Take profit is set either equal to stop loss, or twice as much.

Other forex breakdown strategies

Ivan Borisov

A person who knows everything about forex trading strategies! Since 2008, he has been offering us various options and opportunities for trading on the Forex currency market: authoring techniques and popular strategies from the Internet.

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