4H Trend Line Breakouts

4H Trend Line Breakoutsis swing trading system.

System Overview and Chart Setup

There are actually a few ways to determine a breakout, and we will cover two of them as we get into entry signals. For now we just need an idea of what we are going to do and then you need to setup your charts.

For this system we will use four indicators.

• Exponential Moving Average 30 Period

• Exponential Moving Average 150 Period

• Exponential Moving Average 200 Period

• Exponential Moving Average 365 Period

Be sure to add each indicator with a different color so that you can clear see which EMA you are looking at. Putting these indicators on a chart, your new chart should look something like this:

A quick rundown of which each indicator will be used for:

• EMA 30 – This is our current trend indicator. In a strong trend a currency pair will have a tendency to retrace to the EMA 30 and then bounce off of it.

• EMA 150, EMA 200, EMA 365 – These EMA’s help us to find support and resistance levels. Most of the time these are your strong support and resistance levels, and if you look at them on a 4H chart you will see that more times than not a currency pair will bounce when it hits one of these. Using a breakout system to trade with greatly increases your probability of winning on a trade, and that is the reason why this type of system tends to work so well. There are a couple of reasons why breakouts work.

First, you are trading with the trend. You are always better trading with a long term trend than you are against it. Simply by trading with a strong trend you are likely to win. A breakout point gives us that entry point. Based on prior market behavior we know that when a breakout occurs, the currency pair is very likely to continue on with its trend. This makes breakouts one of the best entry systems you will ever use.

Entry Signals and Stops

With this trading system we will be using two different styles of breakouts to identify our entry points. One is called a trend line breakout and the other is called double tops. Being able to identify both types of breakouts is important to trading with this system. To give an example of each, let’s look at some line charts. It should be noted here, that I do not suggest you trade line charts, ever. They just make it simple to show the example of what the breakout looks like. Below is an example of a trend line breakout:

In this example the currency is currently in an uptrend. For a short time, it retraces to create a new downward trend line. After moving down for a time, the currency reverses to follow the trend, and then two important things happen that make this a trend line breakout:

1. The currency crosses back up through the trend line.

2. The currency retraces slightly to touch the trend line again (or almost touches it)

and then shoots back up to follow the trend.

Rules and Entry Signals for Trend Line Breakouts

When we find a trend line breakout, we follow some simple rules to enter the trade. The complete list of steps you need to take before entering a trade using this system and this entry signal include:

1. Open a 4H chart with the currency pair you want to trade.

2. Determine the current trend. Is it in a long term up trend or a down trend?

3. Determine the relation of the currency pair to the 30EMA. You will find that when breakouts occur, the currency pair will tend to be close to the 30 EMA and possibly bouncing off of it.

4. Look for consolidations in the currency. That is support in a downtrend, or resistance in an uptrend.

5. Draw the slight downward trend line on your chart.

6. If the currency has broken through the trend line then we wait for it to retrace before entering the trade.

7. Once the currency retraces and bounces off of your newly drawn trend line that is our entry signal.

8. We enter the trade at the opening of the bar after the currency pair bounces.

9. We set our stop a good distance back of the trend line that we drew (Usually 25 –

50 pips, depending on how fast the market is moving).

10. When the trade moves in our favor the same level as our initial stop we set our

stop to the breakeven point. To add clarity to our rules let’s look at an entry signal on a chart.

Using our entry rules and the chart above we get:

• We have determined the currency is in a uptrend.

• The currency hits a resistance level, retraces and we draw a trend line to follow it back down.

• Indicated by #1 – the currency breaks through our newly drawn resistance level and closes above it (the whole bar is above the line).

• The currency then retraces, and bounces off of the trend line (shown by number 2).

• On the next bar after the bounce we enter the trade.

• We set our stop 25 – 30 pips back of the trend line.

Rules and Entry Signals for Double Top Breakouts

Now let’s look at an example using double top breakouts for an entry signal. The rules are largely the same, but let’s go through them again for clarity.

1. We have determined that the currency is in a current uptrend/downtrend

2. The currency is hovering around the 30 EMA – this tells us that a breakout could occur.

3. The currency has found a support/resistance level and bounce off of it twice – forming a double top.

4. We draw a line across the tops to give ourselves a visual representation of the support/resistance level.

5. The currency breaks through the support / resistance and closes with a bar completely on the other side of the line.

6. The currency retraces again to bounce off of the line, before continuing on with the trend.

7. We enter the trade on the next bar after the bounce.

8. We set our stop 25-50 pips back of the support/resistance to give ourselves some breathing room.

9. When the trade moves in our favor the same amount as our original stop, we set the stop to the breakeven point.

Stop loss

• Entered the trade with a 50 pip stop.

• Trade moves in your favor 50 pips

• Move your stop to the breakeven point.

• Move your take profit ahead by 50 pips

• Trade moves in your favor by another 50 pips

• Move your stop by 50 pips to ensure you protect your profits

• Move your take profit ahead by 50 pips again.

• The trade moves in your favor another 50 pips – again you move both levels.

• Repeat this process until you stop out

Long Trade Example

Let’s start out with a long trade example. This trade is a trade I made with the EUR/USD currency pair at the beginning of July.

The currency pair was in an up trend, and it is near the EMA 30. Actually in this case it was bouncing off of it. The currency pair had retraced for a time, so I drew my trend line. The pair then broke through the line. The first time though it was a false breakout. Instead of retracing and bouncing off the trend line, it retraced right through it and bounced off the EMA 30. A couple of days later though, I did get an entry signal with this same setup. The currency pair had broken through and close above the line, and this time it did retrace and bounce of the trend line.

I entered this trade at 1.3618. My initial stop was set 50 pips back of the trend line. In

this case my stop was 1.3557. My risk level for this trade is then 1.3618 – 1.3557 = 61 pips.

My goal with these types of trades is always to make double what I risk, so I set my take

profit at 122 pips ahead, or 1.3774. Near the end of the day following my entry into this trade, I hit my take profit level and I exited the trade with a health 122 pip profit!

Short Trade Examples

When making short trades, all of the rules we have laid out for you thus far are the same, everything’s just upside down. Looking at the example trade on the next page, this is a USD/JPY trade that I made back in April.

Looking at the chart, we have:

• The currency pair is currently in a down trend.

• The price point is near the EMA 50, and has actually been hovering below it for a few days now.

• The price has traced back up for a time so I draw my new trend line.

• The currency pair broke through my trend line and close with a full bar on the other side of it.

• The currency then retraced a bit, almost hitting the trend line, and then bounced to follow the downward trend again. The results of this trade are laid our below.

• Entered trade on the bar after the bounce at 114.40.

• Initial stop set 25 pips behind the trend line at 114.86

• Initial risk is 46 pips, so I set my take profit at 2 x that level, or 115.32

• I hit my take profit level about 28 hours later for a profit of 92 pips.

One quick note on this one: For this trade the main reason I used a 25 pip stop instead

of setting back 50 points from the trend line for a couple of reasons. First, the

downtrend was really only a few days old. Secondly, it almost looked like the currency

was about to start trading sideways. This was a judgment call, the trade signal was valid

so I took the trade, but because of those two factors I used a smaller stop and a smaller take profit.