[B]Breakout System X-treme (BSX) [/B]
There are very few things we can be certain of in forex trading, so we have to take advantage of high-probability setups. For example, what usually happens after a long period of consolidation? That’s right – a breakout.
After trading within a range for a long period of time, we can reasonably expect a strong move when price breaks out. The narrower the range, the more violent the breakout. The longer the period of consolidation, the stronger the breakout. This is why I’ve found the BSX (Breakout System X-treme) to be an effective system.
The BSX is a variation of the inside day breakout strategy. For those of you who aren’t familiar with the inside day strategy, it uses the daily chart to spot breakout trades.
Basically, we wait for price to form what I like to call a “Master Candle.” A Master candle is created when price forms at least two succeeding candles whose highs and lows stay within the Master candle’s high and low.
Here’s a visual example of what I’m talking about:
From my experience, USD/JPY and USD/CHF tend to best for this strategy as price on these two pairs can range for long periods of time.
No indicators, no BS, just pure price action on the daily chart.
To enter a trade, we must first find the days when price is ranging. To do this, look for candles which are “eaten up” by the big master candle (refer to the picture above).
What you want to look for are formations like this and jump in immediately once a candle breaks below/above the high/low of the MASTER candle.
I repeat, jump in at the break of the MASTER candle! Don’t be overeager and enter on the break of any of those small candles! It’s a fake out more often than not!
I like to set my order 2 pips + spread of the high low. If I’m trading EUR/USD for example and the spread is 1 pip and the high of the master candle is at 1.4000, I will set a buy stop order at 1.4003.
As for my stop, I place it at the middle of the master candle. The profit target is twice the size of your stop. Of course, adjust position sizes accordingly. I risk around 2-5% of my account per trade.
You can change your risk management rules depending on your style
Here are a couple of examples that I found on USD/CHF’s daily chart. The first one was a winning trade while the second one lost.
Any thoughts on this one? I’m still thinking if I should add any indicator to this…