Breakout — Close of Body

The Trading Strategy:

Breakout — Close of Body

Trading Strategy Implementation:

Because there are a ton of breakout approaches out there that are frequently discussed by traders, we are going to try to define the differences of the ones we study by name. In this case, the Close of Body references a horizontal level that we define via candles as the range the market is looking to break out of.

For starters, we need to define an area that is either choppy or congested. In terms of breakout strategies that we Pipsters have employed over the years, the one constant that we discussed when prepping for this page was this:

All breakout strategies that we have considered are built around the idea that the market has bottled, and that there needs to be a release in order for the market to continue breathing.

The simplest way to define a bottling area is to simply look at the relative range of a period and compare it to a collection of other similar periods (in terms of trading range/time.)

For instance, in the image below, you’ll see that two periods are colored. They both contain the same amount of bars, yet one has a dramatically larger range than the other. The yellow area clearly is an area of congestion, and it is in these areas that breakout plays can be considered.

Now we do not mean to put together a full trading system on one page. A trading system involves money management, trade management, risk analysis, etc. This is simply a look at a commonly discussed trading strategy, and hopefully you Forex traders, or traders of any market, really, can come to your own conclusions regarding the value of the strategy.

As for time frame, for this one we decided on a 1 hour chart.

Need it be a 1 hour chart? Not at all. It’s simply a reference point. I personally traded breakouts on a 5 minute charter for nearly half a year.

So, assuming we, as breakout traders, approached this market and saw that the heavy congestion was occurring, we could very simply address this yellow area and set some definite parameters. For one, the market is either going to retrace or continue. It can’t go on in that sort of congestion range forever.

The question is, can we, with any probability, honestly and consistently take on the market and make money with breakouts?

Well, we need to start our investigation, and the ‘close of body’ breakout is as good a place as any. When we say close of body, we mean that the body, not the wick, is the area of most interest to us. And because of this, we look to define our “breakout area” by these very bodies.

In the 2nd image we’ll share, the yellow area is defined with body defined horizontal levels. Assuming we watched this period and range develop in real time, we definitely would have noticed that one large engulfing bar essentially set the range, and that this range is pretty much defined in that bar.

We then, once we’ve captured the range, define areas to enter the market anytime we have an OPEN outside of this range. The Stop Loss is set at the opposite horizontal line. (If it’s a long play, our SL is placed a spread’s distance plus one behind the red line, and vice versa.)

Our third image shows that we actually gapped through the area and ended up with a full bar breakout. Assuming we needed the proof of history to enter, we can make the claim that a reasonable entry took place at 0.8336.

This puts our SL at 0.8290 or thereabout, and forces us to consider our Take Profit, which, as responsible traders, ought to be at least 2 times the distance of our SL. So our TP 280 pips away. This is a LONG TARGET, and carries obvious risk. We’re really looking at a swing trade here, but the issue of swing or intraday is not so much the issue; it’s the matter of defining the breakout strategy.

Strategy Concerns:

In this case the trade definitely would have led to success. But our concerns about catching breakouts (and not fakeouts) has been readily discussed privately by us Pipsters, and we remain in a state of deliberation.

The main concern we Pipsters voiced when discussing this trading strategy during our daily webinar is that we’ve all worked with breakouts, and although they can be tremendously lucrative, they are HARD to trade — particularly on the emotions. Breakouts come with fakeouts, and there is simply no getting around it.

Plus, the breakout always seems to retrace, so money management needs to consider the fact that this is not going to be precision trading. And this matter is an added stress, in the opinion of us Pipsters.

Also, there is the issue of timing. Timing breakouts can be a challenge. The chart we selected (at random… remember, we’re not advising anything here) did offer a nice win, as can be seen below.

The market went as high as 0.8675, so to be honest, there was plenty of room to place a trail and really see some nice returns on the risk.

Conclusion:

We Pipsters have since moved away from the breakout, but the truth is we all are impressed by those who have mastered the approach. In the coming weeks we will be showcasing other breakout strategies, and hopefully these offer you some suggestions for comparison.

Breakout trading is a challenge, but when done right, the risk:reward ratio can be favorable, and quick wins can be had.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section below.

You may also like...