Break-out systems can actually be considered another form of swingtrading(which is a style of short term trading designed to capture the next immediate move).In other words, the trader is not concerned with any long term forecast or analysis, only the immediate price action.
Volatility break-out systems are based on the premise that if the market moves a certain percentage from a previous level, the odds favour some continuation of the move.This continuation might only last one day or go just a little beyond the entry price, but this is still enough of a profit to play for.A trader must be satisfied with what ever the market is willing to give.
With a break-out system, a trade is always taken in the direction that the market is moving at the time.It is usually entered via a buy or sell stop.The bit of continuation that we are plying for is based on the principle that momentum tends to precede price.
There is also another principle of price behaviour that is at work to create trading opportunities.That is the market tends to alternate between a period of equilibrium(balance between the supply and demand forces) and a state of disequilibrium.This imbalance between supply and demand causes range expansion(the market seeking a new level) and this is what causes us to enter a new trade.
There are several ways to create short term volatility break-out systems.The different types of systems based on range expansion test out quite similarly.Therefore, whichever method you choose should be a matter of your own personal preferance.
Highest high of the last two days in the case of a two period channel break-out.In the case of an inside day break-out pattern where one buys the high or sells the low of previous candle, a one period channel break-out is actually being used for the trigger.The most famous long term break out system adapted by Richard Dennis for trainning the 'Turtles' was the four week channel break-out originally designed by Richard Donchian.Other break-out systems can be based on chart patterns ie trend line breaks, break-outs above or below a band or envelope or prices.
Trading a short term break-out system can be one of the best exercises to improve your trading.
First it teaches you to do things that are hard to do, buying high or selling low in a fast moving market.For most people this feels quite unnatural.
Second it always provides a defined money management stop once a trade is entered.Not adhering to defined money management stop is the most common cause of failure among traders.
Third, it teaches a trader the importance of follow through once a trade is entered, as most brek-out systems perform best when the trade is held overnignt.
Last it provides a great means for traders to improve their execution skills.Most volatility break-out systems are fairly active compared to a long term trend following system.A trader can gain skill in placing orders in a diverse number of markets.Having a mechanically defined entry point is sometimes just the thing needed to overcome a traders fear of pulling the trigger.The order is placed ahead of time and the market then automatically pulls the trader into a trade if the stop level is hit.
Even if a person prefers to ultimately enter orders using discretion trading a mechanical volatility break-out system can still be an invaluable exercise.It should at least increase a traders awareness of certain types of price behaviour in the market place, especially if one is conditioned to entering on counter trend retracement patters.
They are durable and robust.The best break-outs won't give you retracements to enter on.You are either on board or you are not.Usually it is best to have a buy or sell stop already resting in the market place.If your trade gets stopped out and a new signal is given in the opposite direction this reversing trade usually makes up more than for the first loss.Whipsaws are a drag but they are also inevitable when trading a break-out system.Many times you have to buy the highs and sell the lows.It takes agreat deal of confidence in the numbers to trade this type of system.
on balance, a volatility break-out system can be traded on most all markets.However, a market might be very profitable one year and yet perform mediocre at best the next.A port folio of 10 to 12 markets seems to work well.Many times in system development people overlook what one person can realistically mange.Enhancing a basic volatility break-out system, adding filters can sometimes create further enhancements.Place initial risk management stops once a trade is entered.
Exit strategy.Gain confidence by first trading a system on paper.Make sure you can successfully trade a system mechanically before attempting to add any discretion.
Range break-out pattern.A strong buy signal.Note that the range break-out of the trading range defined by the two range lines with large volume.The trading strategy for range break-out, it indicates a strategy of buying as the price breaks the upper range line with larger than average volume and continuing to hold until the rate(Price) has has risen a distance comparable to the height of the range. If it goes down instead, one should stop lossess as it penetrates the lower range line.
Break-0ut. Break-outs fail very often and is dangerous.Beak-out confirmation is required from lower time frame.If the first retracement is shallow and above the break-out point, break-out is confirmed.Very few break-outs are true break-outs.
Range based strategies.Range traders live by the premise of buying bottoms and selling tops.These range traders don't care about direction.The underlying assumption of range trading is that no matter which way the currency travels, it will not likely return back to its point of origin.In fact the range traders bet on the possibility that prices will trade through the same levels many times and thier goal is to collect on those zig zag changes in direction as many times as possible.
Range trading works on the concepts of support and resistence.Supports and resistance are nothing more than the art of isolating key reference points in the market that provide buying and selling presence.
1 Range based strategies ---> small profits (No of trades more)
2 Trend Based strategies ---->big profits (No of trades limited)
Focus on key areas of support and resistance.
Richard D Wychoff(1919) .He was fasinated by spring and thrust moves.These moves often lead inexperienced traders to bail out just before the real move.
Trading is all about your probability of survival.To survive you cannot risk more than you should.Risking too much is not smart money management.
Simple systems work best.You don't get paid for being clever in forex markets.You get paid for being right with your trading signal.This means a simple, robust forex trading system, this was true 50 years ago and is still true today.
RICHARD DONCHIAN. Born in Hartford connecticut in september 1905 over 100 years ago.Richard Dennis and Ed Seykota were inspired by his work.Many modern trend following systems such as Turtle Trading System are based on his work. He became successful at the age of 65.He started making large returns after that and continued to trade until his 90's.
The 4 week rule. The 4 week trading rule system has been at the heart of many successful trading systems and is one of the simplest, easiest and most profitable ways to trade trending markets.
THE RULES 1) Close short positions and go long whenever the price exeeds the highs of previous 4 calender weeks. 2) Close long positions and go short whenever the price falls below the lows of the previous calender weeks.
If run with SAR (Stop and Reverse), the above system will always maintain a position in the market ( either long or short).
FILTERS Enter on the 4 week rule (the break-out) and to exit on a shorter time frame such as one or two weeks.Traders can also use other exit rules ie exit when the moving average is broken.For example applying a ten day moving average as the exit. A ten day moving average is one half of the entry signal(four weeks is ofcourse twenty trading days) but any time period shorter than the entry signal can be used.