Rate my modified daybreak strategy

So I have been interested in trading for the past 2 months, I’ve ran through pipsology and I’ve traded demos on a few different brokers. I am going to trade on a live account soon and I wanted to post my trading strategy to see what everyone thought. All support and/or criticism is welcomed.

Modified Day Break Strategy

Here is the thread for the daybreak system, as well as another modified version.

http://forums.babypips.com/free-forex-trading-systems/45422-daybreak.html

http://forums.babypips.com/free-forex-trading-systems/45633-triple-threat-exit-strategy.html

I started trading using the daybreak system that won best system of the month this past June, basically if price passes the high of the previous day, go long, if it passes the low of the previous day, go short. It’s very, very simple which is why I like it and why it makes sense; it’s also very easy to back test. I don’t do exactly what is described in the daybreak thread but it is the main influence for this style that I am using. When I want to trade on the high/low of a daily candlestick I look on the smaller time frames to find a more precise entry; that is the main difference. For indicators I use 50 and 100 period moving averages just as dynamic support/resistance and possibly a crossover to confirm a trend. I also use Bill Williams’ fractals to help confirm areas of interest. I don’t put a lot of weight on any indicator; I just use them to help me read the charts.

I also trade on the principle or philosophy of fractals; fractal simply meaning a pattern in nature repeating itself. If I see an entry point on the daily chart, I look for the same pattern on smaller time frames. A very precise and distinct formation will be visible on multiple time frames. If a low/high forms on a chart, I zoom to smaller time frames and see what the price did to form the high or low. Maybe price bounced off a high/low many times during the day or maybe it only hit that area once and pulled right back; this is important information to have. There are 24 candles on the 1H chart for every 1 candle on the daily chart, those 24 candles are going to have a lot of information that the daily candle won’t show. So I use the Daily chart as my base chart and then use the 15 minute, 30 minute or 1 hour charts like a microscope.

Entry

My broker’s day opens at global standard time which is 8pm US eastern. So I’ll look at the charts from about 7-9pm and watch the new days candle form and try to look for some good trades. The way I used the daybreak system was to enter using a buy/sell stop when price breaks the previous high/low, but this can cause problems during periods of consolidation or on candlesticks with long wicks. So I look where the high/low of the previous day is on the smaller time frames and find areas of interest that I wouldn’t be able to see on the daily chart for more precise entry points and stop losses. Once I find a high/low that I like I will set a buy or sell stop for my entry. I am speculating that after this area of interest is broken a trend will begin or resume. It is important to leave a little bit of space between my entry and area of interest because the price is usually going to be moving in a range or channel. I don’t want my buy/sell entry to get triggered at the high/low of a range just for the price to immediately reverse and hit my stop. I want the price to have convincingly broken the area of interest that I am using as an entry point.

Exit

I never use a set amount of pips for stop loss like some traders do. I will usually look for a good area of interest to place my stop on the smaller time frames. If I can’t find a good spot I will just place my stop visually using the grid squares on MT4 as my unit of measurement. The squares on the grid may represent anywhere between 5 and 50 pips depending on what time frame you are in and how much price has moved. When placing a stop I really want to give the pair enough space to move and retrace. I don’t necessarily think how much I am willing to lose (although that is important), I try to think what is the most this pair is going to pull back after my entry is triggered without reversing completely (or how long will the wick on the daily candle be if price moves in my desired direction).

Once I am in a trade I will look for price to move a safe distance from my entry so I can put a new stop at break even, then I look to place new stops slightly beyond support/resistance. Every time I look at the charts to monitor my trades I will look for a new stop loss making sure it is not too close to allow for a retracement. I just keep raising my stop loss to follow the trend until I get stopped out usually for a solid profit depending on how much the trend moved. I’ll hold on to the trade as long as price remains in the trend without hitting my stop.

I might use a take profit if I am not confident in a trend forming or if I set a sell and a buy stop on the same pair (I don’t do that often) to decrease my chances of a loss. I only like to use a take profit if I feel that a pair will reach a certain price but not stay there (like a long wick). The good thing about a take profit is that the wick of the next day just needs to break your take profit level; it doesn’t necessarily matter where price closes. I don’t like to use a take profit though; I usually just try to ride the trend. If I am nervous enough about a trade that I feel a take profit is necessary then I probably shouldn’t look to enter anyway, but that is just me.

Pairs
I like to trade the GBP/USD, USD/JPY, AUD/USD and USD/CAD. I like trading GBP and JPY because they are not too highly correlated with a lot of other currencies and I like the com dolls because of their correlation to oil and gold. I know everyone loves the EUR/USD but I try to stay away from it because of all the issues going on with the Euro zone and the amount of news reports that come out about it. So I avoid pairs with the Euro in it, including the CHF since it is pegged to the Euro. I am pretty new to trading and I don’t use a lot of financial reports or news to trade yet so I don’t want to mess around with any of the BS going on in the Euro zone.

Tell me what you guys think, here are some trade examples in the next post.

Here is the daily chart for my long entry on the AUD/USD that I got in last week. I circled double tops and double bottoms and drew a white line at a good new stop loss which was not seen on the daily candles.


This is the same trade on the 1 hour chart. The candles in between the white lines are the ones that formed the daily candle that I was looking at for my entry. My entry was triggered after the second break of the buy line right at the beginning of the next day, I felt it was a good entry because I was confident in the uptrend and it matched up with the highs in the fractals of the previous trend. The white line is where a stop was set, I could see the pair consolidating just before the day closed but only on the faster times frames.


This is the 30 minute chart, I circled doubled bottoms just to show all the valid entry points, they appear on this faster chart just as they do on the daily chart. All of these would have been valid entry points, I got in the trend late as I sent my entry on the 4th circle just above the moving averages.

The white line was my new stop at a previous resistance which formed a new support level. I made a circle at the top right because price actually broke my stop just slightly but it didn’t trigger the exit. I don’t exactly understand why that happened but it it does show how accurate the stop was.


This is another trade (USD/CAD short) where you can see a more precise entry on the smaller time frames. I saw the pair consolidating and my entry was triggered after the second drop below the sell stop line. The first white line on the daily is where I entered using the 1 hour chart and the second line is where I would have entered if I was using the low of the previous day. I also circled the 2 areas of resistance that I used as a stop loss. I set that stop loss before I saw any real consolidation but it ended up working out excellent. This illustrates my goal with a stop loss, to try to predict the maximum amount price will pull back without getting stopped out.