High/Low Breakout Strategy

Trading Systems Free Forex Trading Systems
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Greetings Traders,

I am here to bring you my very original trading strategy. Please subscribe if you find this interesting or if you would like to see my insights. Also, feel free to ask questions, or post your own ideas regarding this strategy. It’s built to be modified and tailored to every person. =]

Before we get started, I just want to give you some information regarding myself and how I came to develop this.

I am a US Citizen and originally got involved in the NYSE but then I moved to Germany and the time difference wouldn’t allow me to trade the stock market. I was a little bummed, but then I found out about the FX Market being 24 hours a day. I was hooked. I have spent all of my free time studying and developing a trading strategy that will fit my needs, comfort level, and money management concerns. The goal for me, was to allow myself to have a trading strategy that will consistently make a profit. It also had to allow me to trade around my job. I work in the US Military so I needed a way to trade with my very busy schedule.

My idea came to me as I was just looking over the daily candles and I noticed something very, very interesting. Almost every single day, the price will move past the high or the low of the previous candle. If it doesn’t, then an intrabar candle appears, and the next candle will move past the mother candle’s high or low. Let me insert a picture to explain what I mean.

HL breakout explanation.jpg590×700 57.8 KB

Here is the logic behind this strategy. Since we are using the previous high/low on the daily candles, this also means we are using the widest range of support/resistance in a 24 hour period. This means that as price approaches these key s/r levels, price will either breakout, or fail to hit that level. If it fails to hit the level, it will either breakout on the other side, or you will end up with an Intra-Bar setup. Another psychological explanation behind this is that most traders are seeing the previous high or low being approach, and they add to the fire causing an increase in volume which fuels the breakout.

“Hey AK, you missed something. What if price touches the high or low and then retraces against you? Doesn’t that make this strategy suddenly very risky and unreliable?”

Hey there sneaky guy, I’m glad you asked. I’m more than happy to answer that for you. =]

You have to remember that the previous high and low that price is now approaching is the WIDEST support/resistance in the last 24 hours? Do you know what this is and how amazing this is ?!?!?!?! No? This means price has never hit the level since in the last day. Also, remember in my picture example? Round your pip down/up and add/subtract 1 pip to avoid those pesky pipettes causing your entry to end up getting stopped out.

“Also, Let’s say it hits your entry, and starts to go your way and then reverses before your target it hit, what do you do then?”

Well, there are two possible answers. Either it actually is a loss and you shouldn’t get bent out of shape about it, or… you set your target profit way too high.

Example: Too high means you set a target profit that is generally higher than the average pip range on daily candles, like 300 pips or unlikely to have a breakout that high before a retracement.

Example: Is my trade a loss? Well, either you didn’t do what I told you to about rounding and your entry was on pipettes or it is a loss. The trade is an acceptable loss if it breaks the high/low, your entry is hit and the price moves only 2-3 pips before it heads the other way and you get stopped out. This is OKAY, you will experience losses my enthusiastic trader! There are two things to remember about losses. Make sure that when you lose, you lose small and your wins are big, and make sure that your money management allows you to live to trade another day!

“AK, what does that have to do with the retracement?”
What an eye you’ve got there my fellow trader! I could tell you, or you could take my word for it. Both choices aren’t good because you wouldn’t understand it, and simply trusting me without understanding can cause you to make careless mistakes.

“Oh no! What do I do then?”
Never fear, young padawan. There is hope. You can look at the previous results. Remember, yes the daily candle will breakout on one side of the previous high or low, but you can get stopped out intraday. You enter with a stop of 10 pips, and the price retraces 15 pips, only to then to breakout a whopping 60 pips! You have to look at the previous results to answer all of these questions, never fear. I will tell you how to do so.

[B][I]EDIT Apparently, as I’ve been told and have also found other threads pertaining to this, This is not an original creation. People have thought of it and shown their results of it. I hope that my Twist will make this strategy more profitable.

I recommend searching for the thread “DAYBREAK” by pipwoof. He has some great insight on this, and has even confirmed many of my observations and considerations. [/I][/B]

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I will show you how to actually see what the price does around the highs/lows. Its rather simple and isn’t that difficult to figure out.

I will use the previous example as my daily candle. It is of the EUR/USD with the giant pinbar being December 27, 2013.
Here’s what I do. I will draw my lines on the high/low of the candle on the 26th. Then on the 27th, look at a 5 min chart where those lines are to see what prices are doing at the high/low.


Here, we see the daily candle high for the 26th.

2.jpg700×397 38 KB

And here, we see the 5 min charts as price approaches the previous high(or low) for the breakout trade. This is an example of what you might get from looking at previous High/Low Breakout trades. You can see that a 5 pip stop gives you enough room. Now if you back test this enough, you can probably develop an average stop loss and target profit and find out your winning average.

“AK, What are you talking about? This isn’t relevant to the trade!”
Ah, but it is. Let me explain, viewing what “”“would have happened with price”""" if you HAD entered gives you a TON of information. These gold nuggets are the fact that you can see how often you are stopped out.

“AK, that’s just silly. I can just increase my stop loss.”
Absolutely you can! But you have to remember, if you increase your stop loss, you’ll probably increase your target profit as well, and then you run the risk of price not hitting your profit now, and then turn around and stop you out. So here is the reason you want to look at price at these levels!

“Drum Roll Please!”

Viewing price as it approaches the previous high and low will allow you to get proof for yourself that this works. It also plays the role in allowing you to back test this strategy in accordance with your own money management rules. For example. If I set a 6 pip stop, with a target profit of 25 pips, how often will I get stopped out? How often will my target profit get hit? Overall how many pips would I have made in the last month? How many did I lose?

And here’s the most important part of it: If you had adjusted your stop loss or your target profit to say 7 pip stop and 20 pip target profit, would you have kept more winning trades and in turn more pips? Basically, you are getting the opportunity to back test this system and make it your own with your money management rules.

“Man AK, You give me all this, but now you’re telling me to back test it myself? Why don’t you just tell me what to use?”

Well my good friend, I actually HAVE NOT finished my back testing. Also, I just gave you some very good insights on daily trading. I have to explain, that I made this strategy because I work from 0500 to 1800 most days. This way, it allows me to trade on the side even though I am missing the most volume time periods and I don’t have to stare at the charts all day after work. In fact, I am actually going to tell you what I use and why I came to that decision. Also, I am still demoing this strategy because of the irregularity in the market during the holidays. I want to keep demoing it until I am sure of it under normal market conditions.

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This is what I do to trade and my settings as of current.

After the market close for my broker, either NY close or London close charts will work, I tally up my High and my low for the day. I then round my HIGH DOWN TO THE NEAREST PIP. Then I round my LOW UP TO THE NEAREST PIP. The next step is my entry order.

I place a One Cancels the Other long at my rounded high + 1 pip and my short at my rounded low -1 pip.

Daily Close: NY or London works

Currency Pairs: I have only tested the majors, because I’m trying to avoid pip spread costs, I only stick with the majors. If your money management allows you more freedom, theoretically, this High/Low breakout should work on any pair.

Target Profit: 25 pips. I have found thus far in my testing, that any higher will result in retracements before your TP is hit. I have yet to determine this, but If you have London Close charts, and you trade the EUR/USD, GBP/USD, EUR/JPY, EUR/GBP, the momentum and volume from the London open should allow you to increase your target profit as well. Once again, I haven’t tested this, but it makes sense to me.

Stop Loss: I’m stuck between 5-8 pips. I’m trying to figure out what will give me the best winning average. I’m also developing this strategy based on having a maximum of 2.5 as a pip spread to determine my Risk:Reward.
[I][B]
EDIT I am now finding a 10 pip stop loss looks to make a better filter for the market fluctuations and I’m not getting stopped out a lot. So using a 10 pip stop with a 2.5 spread, its turning out to be a 1:2 risk to reward, however it looks like my winning average is increased, so the profit is going up, even with the higher risk. Interesting! A lower risk to rewards doesn’t mean less profits. Mind = Blown. [/B][/I]

[B]“AK, why did you pick that S/L and TP?”[/B]
If you’re still asking these questions, then you shouldn’t be looking at this thread, as you aren’t putting enough effort into reading and educating yourself from my thread.

What I can give you some insight is currently I’m winning 4/5 trades right now. This brings me to atleast 200 pips a month after the pip spread.

[B]“AK, that doesn’t seem like a lot, other people make a lot more than that!”[/B]
Well, my good man, they could be lying. Or they have a lot more as their margin so they can have a higher stop loss. What I’m talking about is this system is optimal for those starting out with anywhere from 1500 USD to 5000 USD. To explain what 200 pips means is this.

The 2010 Dodd-Frank Act limits American Citizens from using more than 50:1 Leverage.
[B]Gasp “AK, I didn’t know that!”[/B]
Yes well its there, but you can still go with a foreign broker, if you’re an American trader, you have probably found a lot of foreign brokers that won’t accept you as their client. Some brokers will Spartan Kick CFTC and NFA officials who try to tell them they can’t offer US Citizens more than 50:1 leverage. It’s because of taxing and politics etc, we’re getting off topic.

So, for example, on the EUR/USD using 50:1 leverage at a gain of 200 pips, investing 5000 USD will return 5000 USD at the end of the month.

Yes thats a nice return in dollar amount for an 80% (4/5) winning average using my 25 TP rule, but don’t be a noob and Invest your total account as your margin. Remember, and I live by this rule, “Live to trade another day!”. This strategy is tailored to the individual on money management, But my intent is to give the average person the opportunity to make atleast a reasonable amount of money trading just once a day, without the stress of the market weighing down on you.

[B][I][U]Forex can be a good supplementary or full time income, just be sure you are following the appropriate money management. Also, Don’t use this system as a 100% win, get rich quick opportunity. Rome wasn’t built in a day, but it could definitely be destroyed in one.[/U][/I][/B]

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This post is reserved for my most recent back test results.

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Here I will post a more advanced entry regarding what happens if you set your entry up and it doesn’t get hit?

"AK, what do you mean if the entry isn’t hit? How can that happen?"
Don’t worry, you didn’t do anything wrong my fellow pip crawler! this means that price never hit the high or low making the whole candle become an inside bar. There is a neat bonus that occurs with this strategy that can potentially double, triple, or even quadruple pips gained in a trade.

I’ll get back to this in a bit though, I’ve done a lot of typing and editing and so forth. Subscribe and stay up to date.

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Reserved for Additional Needs

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This certainly seems like a promising system you have developed awk3524. I hope it goes well and I look forward to seeing your results!

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Thank you, I am doing some manual back testing and am finding loads of information. I have just found out that my risk is 2.5% so I’m really looking forward to getting it ready for the new year. We’ll have to see if it holds together after the holidays.

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lol … this is probably one of the oldest and best known startegies around.

good read though; i would suggest that you stop your manual backtesting and build a EA for. It will give u much better insights and such mechanical system shouldnt be done manually anyways.

happy new year

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I’ve never seen it before, but if it does exist, then I at least I thought it up without outside influence.

I don’t know how to build EAs so that doesn’t do me any good.

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Nope…this is original to awk…he is the original founder…lol

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original or not as long as it works it doesnt matter. I hope to see your result next month.

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Correct on that

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Thanks for posting this awk , ive started demo’ing it myself. Could you post the specific details on the next trade you take and the result just as an example?

Thanks.

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Absolutely, I will be posting it up as soon as the day closes. I am finding it might be easier to use NY close charts because they only use 5 day weekly candles. Right now there’s a bit of confusion with this doji for the sunday candle. I think I may just stick with the ny close to avoid that.

Also, I’m finding that mondays are difficult trades because they go off of the previous friday as the daily candle. I believe the monday difficulty can be attributed to the news reports that occur over the weekend. It could also be because of the US Jobs report given every fourth friday. I need to get some more information from my back testing.

On a side note, babypips suggests that the worst days to trade on are monday and friday. monday, because of that reason, and friday because most people are trying to close out trades by noon. So friday might be a day to watch and see how much volume and volatility is occurring during the first few hours of the market. If on average the TP is hit by noon on friday, Friday could still be a “recommended” day for this strategy. Monday will take some time to determine.

Thanks all for your input. I will be posting daily charts regarding this strategy, and I will be available during the weekends to discuss improvements and such.

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[QUOTE=“awk3524;583161”] Absolutely, I will be posting it up as soon as the day closes. I am finding it might be easier to use NY close charts because they only use 5 day weekly candles. Right now there’s a bit of confusion with this doji for the sunday candle. I think I may just stick with the ny close to avoid that. Also, I’m finding that mondays are difficult trades because they go off of the previous friday as the daily candle. I believe the monday difficulty can be attributed to the news reports that occur over the weekend. It could also be because of the US Jobs report given every fourth friday. I need to get some more information from my back testing. On a side note, babypips suggests that the worst days to trade on are monday and friday. monday, because of that reason, and friday because most people are trying to close out trades by noon. So friday might be a day to watch and see how much volume and volatility is occurring during the first few hours of the market. If on average the TP is hit by noon on friday, Friday could still be a “recommended” day for this strategy. Monday will take some time to determine. Thanks all for your input. I will be posting daily charts regarding this strategy, and I will be available during the weekends to discuss improvements and such.[/QUOTE]

Hey man, my two cents…

I think you jumped the gun with the thread, but at least you are making it clear that it’s a work in progress (even if the thread title does not).

This strategy is probably one of the most studied and worked on strategies in Forex… and you should be aware of this. There are tons of versions out there. It’s nice to be working out your own version of it, but as you are seeing… there are lots of variables to get under control. I think it can be done, but you have some work ahead.

Best of luck with it, I think there could be something there.

I see you are using Dukascopy… I am as well.
How do you like it?

A former Coastie

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its nice, but i am also liking stock-trkr because they use ny close and they allow me to easily place price levels.

And you are right. I am looking at volatility periods and whether I should be concerned with certain days. The appropriate stop loss and target profit are my main concern to just get in, make my pips, and end the trade, which is still a working progress. I have seen lots of approaches to this strategy now, but they all look at it on the daily chart, and have massive stop losses due to intraday movement. they haven’t taken time to look down at the moment the trade is initiated.

Most people are lazy with this strategy. It is a very nice, very simple strategy and pretty much gives you the trade, but most traders are trying to turn it into an EA so they dont have to do anything. While I can appreciate that, this is a little difficult to turn into an EA because it will take every trade into account. Using this strategy, I don’t like to take more than one trade a day, so if it’s a loss, i call that day a loss. And I live with it. Most people just want to set the EA on the daily, with no effort into looking at what happens at the trade, which is what I’m offering.

For example, they are setting the EA to take the trades that meet the criteria. This means if a signal for long is entered, they enter and they get stopped because there wasn’t a strong enough breakout. But, if there is a lot of volatility and high range of price during that day, they may end up taking a short trade a few hours later. While there’s a chance that that particular trade could cover the previous loss or losses, this strategy adds a complication.

Here’s my example:
Some people who trade this use the breakout as an entry, but like I said previously, they use big stops to give the trade room to run. So what happens when the EA is long and short? Now you are hedging your trades, which means any profit you have is now taking a partial, if not full or more loss. Why use the EA? Because people don’t want to put in the daily effort with this strategy.

Here’s another point:
What happens if you set up this huge stop loss? Then you enter on the breakout of the high. Remember, this is a SET and FORGET strategy. Now a few hours later price moves really high and you have a high TP because of your high S/L. At this point you’re looking good but remember again, you’re not watching the charts. Then the trades into a bearish pinbar. You’ve now lost all that potential profit, possibly entered short and are now in a hedged position. Right now, you owe the broker a pip spread.

My Goal is to find the breakout of the high or the low, and identify the ideal S/L and TP That will give me an 80 percent or more win ratio. Right now, I’m testing out 10 pip s/l and 25 pip tp which is doing well. Just have to see if that gives me a good winning average. It will average roughly 200 - 300 pips a month after the spread and taxes. So I’m okay with that amount. I’m not trying to make 1000 pips a month, but enough to provide a supplemental income to support my family.

Not having to worry about money or trading as a full time job would be simply a bonus. I just want to develop the appropriate parameters to a very simple strategy to help those who need a little extra financial help, to help those develop a fund for the future, emergencies, retirement, etc, etc.

Cheers,
AK

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On another note, putting the effort in to develop the correct s/l and tp will be worth while. Once I figure this out, then all I have to do is set up my orders after the market closes for the next day. Trying to use an EA at this point would be more effort than it’s worth.

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[QUOTE=“awk3524;583358”]On another note, putting the effort in to develop the correct s/l and tp will be worth while. Once I figure this out, then all I have to do is set up my orders after the market closes for the next day. Trying to use an EA at this point would be more effort than it’s worth.[/QUOTE]

Just a couple of comments…

Don’t be so quick to dismis. You can place orders that cancel the other one once they have been triggered. So I doubt any strategy, with more than a couple of minutes of thought behind it, would end up with hedging orders… unless it was a part of the strategy of course. I can even think of strategies that, in theory, could work that way. I’m just saying, there are lots of ways to skin a cat.

I suppose that the strats with bigger stop losses are just a natural response to trading daily charts. You, on the other hand, are taking a very short term, almost scalping approach, to trading with the daily charts. This is interesting, and it might give you that edge that you need. I recommend that you be very methodical and statistical about it. How often does the previous day’s high/low get broken by 20, 25, 30… Pips vs. how often it does not? For example. Remember, smart money is often hunting for stops and pending orders when it price breaks the previous daily high/low. You, with your strategy, are looking to out smart those guys. Maybe even a tighter take profit could prove to be profitable. How often does it go 5 or 10 pips past the high/low? Trading is not just about the number of pips… 5 pips can be just as profitable as 50.

Anyway… Good luck on that and I look forward to seeing what you come up with.

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awk,

What you were saying about monday’s definitely came into play over the last day or so. Today for example you would have been stopped out after the fake breakout to the downside on the EUR/USD.

I’m pretty new to forex as well but this general strategy does show some promise, in theory at least. Have you considered increasing the pip amount you add to the high/low price after rounding? One pip may not be enough to truly insulate you from fake breakouts.

If I have time I’m going to try using a similar system but increase the entry point to high/low rounded down +5, then maybe plus 7…backtest it and see how the results compare to the +1 you’re currently using.

Just food for thought. Looking forward to seeing how this develops.