The Breakout Trade

One of the keys to determining whether or not this trade will work is confirmation.

Many people write about confirmation but they don’t always tell you what they mean by that statement.

In a down trend for example I look for a closed candle below the “B” low on a 30 minute chart. If I see a closed candle then I have a potential signal candle. (day trading) Once I have the first part of my confirmation, I look to see that the two indicators are not showing any divergence (i.e., when price is making a new low, so should the CCI and the MACD histogram indicators).

But the final confirmation comes on the entry.

Price absolutely must go three pips past the low of the signal candle. This is what I consider my entry candle. If I never see price take out the low by 3 pips then I have no entry and chances are that price will possibly bounce in the opposite direction and price could move back up to the highs. So the most important thing to keep in mind is that the entry on the continuation trade is

3 pips above or below the high or low of the signal candle. This is very important.

Another important step in identifying a “Break Out Trade” is labeling your price swings in an A, B, C, D method.

“A” is where a high or low is identified.

“B” is the high or low from the “A”.

“C” is usually the entry on the Pull-Back in a Trend Trade.

but with the Break Out Trade, I must see a closed candle above or below the “B” high or low.

Please remember that it's all about recognizing the pattern. This way you can quickly identify and confirm your trades.

Targets are based on the “A” to the “B” price swing. If the “C” forms a candle pattern at a Fibonacci retracement, pivot point or / and a psycho level and no further than the 618 retracement level, then I would look for a potential target at the 1.618 extension level. The extension targets will work best when they line up with a psycho level or support or resistance level.

The stop loss level is 15 pips above or below the “C” high or low.

Chart 1 EUR/USD chart. This is the first step in identifying a set up. I always wait for a candle to close. I won't analyze an open candle.

Chart 2 EUR/USD chart. In this example, price didn't retrace much further than the 382 level so I used the 1.618 extension level as my profit target. As always... I confirm my trades with the larger time frames and I must be aware at all times the direction of the trend.

Sometimes a trade set up is easier to see on a larger time frame such as the 1 hour or

the 4 hour chart.

This can happen when the price has been in consolidation for awhile.

You would most likely see in this case a lot of “choppiness” and many false signals on the 30 minute chart. Another thing with the Break Out Trade... I wont take a trade unless I can find a target using the Fibonacci tool like in the example above.

If I see a potential Break Out Trade or Pull-Back in a Trend Trade, I want to know for sure the overall direction.

Example, if I am about to take a Break Out Trade and the market happens to be in a obvious down trend... I don't want to be taking Break Out Trade and Pull-Back in a Trend Trades in an up direction. The best way I can tell trend direction is by looking at the 4 hour and daily chart. If I see a trade in the opposite direction .... I sit it out... I wont take it as hard as it might be. I tried too many times to trade in the opposite direction of the main trend and if my trades turns profitable.... it usually only pays just a few pips and if I am not there to close the trade, it just turns around and stops me out.