[B]Part 1:[/B]
Hi all,
Since English is not my native language, you will probably encounter a lot of grammar mistakes etc, but I assume everything will be clear. If not, just ask.
In this thread I will explain my [B]Morning Breakout Trend Trading System[/B]. I will also write some extra blogposts for additional info about this trading method and sometimes charts to show examples.
You will probably recognize some things (although different) related to the 3 Ducks system. I have followed the course including the private coaching from Andy and have used elements from his trading method to improve my own trading method. Having said that I definitely also recommend to checkout the 3 Ducks system and if you can afford it, take his private coaching. You won’t regret it.
Anyway, as said, I do use my own system and I call it the Morning Breakout Trend Trading System.
[B]Some advantages of the Morning Breakout Trend Trading System:[/B]
[ul]
[li]The system is simple and easy to trade
[/li][li]It’s a set-and-forget method
[/li][li]Trading this system don’t cost much time
[/li][li]You will avoid many common errors if you follow the rules
[/li][/ul]
[B]The goal of the Morning Breakout Trend Trading System[/B]
The goal of this method is having the odds in our favor by not only trading in the direction of the trend, but also trade a vast simple pattern with easy entries and higher chance that momentum kicks in the direction of the trend. Since we also trade in the morning we anticipate on the momentum that kicks in after Frankfurt and London opens.
[B]Step 1: Prepare your trading day – Forex news and calendar[/B]
You don’t have to be a fundamental analyst, but completely ignore this part is not something I would advise. Personally I first read the news from BK Assetmanagement and the reports from Piponomics. It won’t take that much time and by doing this every morning you will get up-to-date about the most important topics.
If you’re not familiar with the fundamentals then you can read the stuff from Babypips school and that combined with reading the summaries daily will really speed up your process.
It’s also important to check the forex calendar for important news events. When you want to be safe you don’t trade Central Bank Meetings, Interest Rates or NFP. I sometimes leave positions open in case of the first two, but only when I don’t expect too much volatility. I never trade NFP.
If you’re a bit more experienced with news events then you can do some more trade management if you like.
[B]Step 2: Select the potential currency pairs for the trading day[/B]
Daily I scan 7 currency pairs: EUR/USD, GBP/USD, EUR/GBP, USD/CAD, USD/JPY and EUR/JPY.
[B]First I look if there is an uptrend or downtrend on the 4H and 1H based on the 50 EMA:[/B]
[ul]
[li]If price is above the 50 EMA on as well the 4H as the 1H then there is an uptrend.
[/li][li]If price is under the 50 EMA on as well the 4H as the 1H then there is a downtrend.
[/li][/ul]
In case the 4H and the 1H chart don’t give the same picture then there is no clear trend and therefore no trade!
Since this is a day trading method we look at the 4H and 1H chart for the direction of the trend. By simply following this rule we have a greater chance that we trade in the direction of the trend.
[B]Secondly I need to see a clear breakout line (sloping or horizontal) on the 1H chart:[/B]
You can draw these lines by connecting minimum 2 highs or lows with each other. Remember: If you can’t draw a clear breakout line then there is no trade!
Since we trade breakouts we anticipate on the momentum that kicks in when a breakout in the direction of the trend occurs. Therefore it is important that others see that same breakout line!
[B]Step 3: Work out the potential currency pairs on the 5M chart[/B]
Now it’s time to plan your potential entry, stop loss and take profit. For this we scale in to the 5M chart.
[B]Draw a horizontal line for the Entry:[/B]
[ul]
[li]Which lies a bit further then a recent high/low or another clear S&R level
[/li][li]Price at the entry needs to be on the correct side of the 50 EMA on the 5M chart.
[/li][/ul]
If one of the two conditions aren’t met then there is no trade or you need to search for another entry point.
You also have the option to only draw an entry after a breakout from the breakout line, in other words, you wait for confirmation of the breakout, instead of anticipating on a breakout. This is an option and not obligated.
In case of a buy pending order also calculate the spread for your order. (So for example in an uptrend the entry is the recent high on the 5M chart plus 3 pips spread,)
[B]Draw a horizontal line for the stop loss:[/B]
[ul]
[li]Which lies a bit further then a recent swing high/low or another clear S&R level.
[/li][li]You can also check if price would be on the wrong side of the 50 EMA in case your SL would be hit. This would be a sign that the setup wouldn’t be valid anymore.
[/li][li]Make sure though that the trade has enough breathing room.
[/li][/ul]
In case of a sell pending order also calculate the spread for your order. (So for example in a downtrend the stop loss is the recent high on the 5M chart plus 3 pips spread,)
[B]
Be creative and use a take profit strategy that fits your personality[/B]
With regards to a take profit strategy there are multiple options and there is no right or wrong. Just remember that we trade in the direction of the trend and the basics of a trend is that there will be higher highs and lows/lower lows and highs. So never think price can’t go any further!
[B]I will give a few options with regards to the take profit level(s):[/B]
[U]Use a standard risk/reward ratio of 1:2.[/U] By doing this you know that you only have to succeed more than 33% to make profit. This is a good strategy for beginning traders or traders who like a vast approach and/or less work.
[U]Split your position and try to let your profits run.[/U] Use with one position a 1:2 risk/reward and leave the other open until the next morning. In this case I would advise also to set a 1:4 risk/reward ratio take profit level for position two.
[U]Split your position and be conservative.[/U] Use with one position a 1:1 risk/reward or a previous high or low as TP and leave the other open until the eveing or next morning. You will experience less swings, but on the other hand your potential profit will also be less.
As you can see there are multiple options and these are just a few of the possibilities. You can also use a scale in/pyramid strategy, but I like it to keep it a bit simple now. As said: be creative!
[B]Step 4: Quality checks[/B]
Now you have prepared all the setups it is time for the last quality checks:
[B]Check the daily S&R levels.[/B] In case you’re trading against an important daily S&R level then you need to consider if you want to open a position. In this case you should be convinced that there is a catalyst or otherwise better not trade the setup, since these levels will be respected often.
[B]Check the daily average range of the currency pair and look if price already has moved a lot.[/B] If that is the case you should ask yourself if it is realistic that your take profit level will be hit.
[B]Check if you see contradictions with regards to fundamentals and/or sentiment.[/B] Again, you shouldn’t approach this too in depth, but there are sometimes very obvious contradictory signals in which case it is better to not open a position.
[B]Step 5: Your own judgment![/B]
You have prepared all the setups and now it is time for your own judgment. [B]You have to judge if the setups are really quality setups.[/B] The first steps already made sure you will avoid the obvious mistakes, but that doesn’t necessarily mean the setups are also real quality setups.
This step is where experience is an advantage. Of course you can check for stuff like price action, patterns, candlesticks, the slope of the breakout line, how the retracement looks etc, but you will also notice that when you have more experience, you will just recognize situations (without really being able to describe why or how) and be able to make better decisions.
The advantage of this trading method is that you trade every morning the same pattern, so in case you’re a beginning forex trader, you will gain experience in a relatively short time.
Just select the best trading setups from the list that you created and let the others go.
[B]Step 6: Risk management and pending orders[/B]
Now it’s time to define your risk management and open your pending orders. First you have to decide how many pending orders you like to open and define your risk per day and per trade.
In case you have more quality setups you can choose to open only a pending order for the best setup or two setups, but you can also open pending orders for all quality setups. In this case you should first decide your total risk for that day and after that split the total amount over all the pending orders.
How much you risk per trade or per day is really depending on your personality. Just don’t risk too much, because otherwise you are just plainly gambling. Personally I like a total risk of 2% per day.
To calculate the lot sizes for the different positions you can use a forex calculator.
After having defined your risk and calculated your lot sizes it is time to open your pending orders.
[B]Step 7: Fill in your trading journal[/B]
If you really want to get a better trader you should take the time to fill in your trading journal. Don’t make it too complicated though, because then the risk of quitting with your trading journal is too big.
An example of the details you can archive are: Date, Currency Pair, Long/Short, Entry, SL, TP, R/R, Profit/Loss and maybe add some screen shots if you like. Besides that you can write down what you have learned that day and how you can improve.
Take once per week/month to analyze your trading journal and you will see that you will make a huge progress comparing to leave this one out.
[B]Step 8: Close your trading platform!!![/B]
Maybe you have heard the saying already “Plan the trade and trade the plan”. You now have done all the work, so the only thing left is to let the market do the work.
When you keep your trading platform open or check your positions regularly you will sooner or later set yourself up for failure. Often traders who check their positions will change things they afterwards regret, like closing the position too early etc. Don’t fall in that trap.
Know yourself and close your trading platform. The only exception can be an important news event where you don’t want to have an open position or widen spread in the evening. In that case you can close your position or move your SL to BE. Besides that: Stay away from your trading platform!
[B]When to trade the Morning Breakout Trend Trading System[/B]
There is actually not an exact rule for this, but it doesn’t mean you can’t use some common sense to achieve better results and/or choose a way to trade that fits your personality.
[B]Let’s first look at the characteristics of the openings of different markets:[/B]
[B]Frankfurt Open:[/B] There are times that volatility immediately kicks in when Frankfurt opens, but there are also times that price won’t really move yet.
[B]London Open:[/B] This is prime time and action is guaranteed. Often big moves occurs shortly after the London Open. In case you trade the London Open you will experience that your position can be in profit very quickly. What also often occurs are big spikes that hit obvious stop loss and after that price will continue in the direction of the trend.
What can you do with this knowledge? Well, [B]first option is to just trade one of these opens[/B] and accept the fact that there will be periods that your stop loss will be hit very quickly to see price going in the right direction after all. The other side is of course that if a big move in the direction of the trend takes place without a spike and your TP level will be hit relatively fast.
[B]Another option is to wait till the dust settles, around 2 hours after the London Open.[/B] Disadvantage is that you will miss some moves, but a big advantage is that you won’t often experience those irritating spikes.
There is however [B]another option and that is to trade both and split your risk[/B] between the Frankfurt/London Open and the other part 1 or 2 hours after.
Again, there is no right or wrong, but it is definitely worth to experiment with this and see with which variant you achieve the best results with and which fit your personality and life best.
To see when these markets open in your local time you can check a Forex Market Hours tool.
[B]Blogposts and trade setups in addition to this guide[/B]
Sometimes I will write extra blogposts or post examples from trades as addition to this guide. I will add those links in this paragraph, so you can check these out as well.
[ul]
[li]FAQ Morning Breakout Trend Trading System
[/li][li]Morning Breakout Trend Trading System Trades from 1 June 2015
[/li][/ul]