Trading breakouts is usually pretty tricky. It can always become a false breakout that could ruin the trader’s trade, by hitting the Stop Loss. To use this kind of systems a trader should find a combination of elements that will lower the probability for a false breakout. As no system is 100% accurate there should always exist a Stop Loss to limit a possible loss.
For this strategy to work, we recommend using currency pairs (or other types of instruments) that usually have high volatility. It can be used on any time frame, but our favorite remains the 15 minutes.
First step is to find a strong upside or downside move, as you can see in the example bellow. The strong move usually suggests that investors are set on a direction. After you have spot such a move, wait for a sideways move (consolidation) that will not go below/above (depending on the primary move) the 23.6 Fibonacci retrace. If these two conditions are met the next move would be to set a buy stop several pips above the high, taking into consideration also the spread.
Chart: GBPJPY, M15
As you can see in our chart, if the Buy Stop is triggered the trader should set a Stop Loss order at the low of the consolidation. There can be several Take Profits levels. First would be a projection of the width of the range, and next could be a projection of the prior move. The second one can give the trader a wonderful risk to reward ratio.
Our example is on an up move, but this strategy can be applied also on a down move. The trader just has to follow the same steps and enter in a trade only if the conditions are met.