By Casey Stubbs — Follow Casey on Twitter to get an alert when he enters this trade.
Trading breakouts is a great trading strategy to add to your trading arsenal. Today, I saw the best breakout setup forming right now so I thought would do I two things to help you become a better trader.
I am going to teach you how I trade breakouts and give you step by step training in how to enter and exit trades.
Show you the current breakout I am watching so that you can take advantage of the breakout that is forming on the Eur/Aud Daily chart.
How to trade Breakouts:
Find a pair that has traded in a tight range for a minimum of 5 days and the longer the time the better the breakout will be generally. Lets take a look at the current Eur/Aud chart and see if we can find a good example. (click to view full size)
If you look at the chart the price is in between the two red lines I have drawn on the chart which is a perfect example of a potential breakout. What we need to look at now is for the price to break above or below the lines I have drawn on the chart. The price is currently in a strong down trend so we might expect for it to break down but the truth is that it doesn’t matter which direction it breaks because we are going to follow what the market tells us.
Step two is waiting for the breakout to occur and a great way to do this is to set an alert. An alert is when your charting software will make a sound or send you a message when the price hits a certain level. In this case we will set our alerts when the price gets above 1.2500 or below 1.2382 .
Take a look at the chart (click to view full size)
After you set your alert for these two levels, it is a waiting game. You want to be patient when trading a break out strategy so that you do not miss the true break out and get stuck losing money on a fake-out.
So, once the price breaks that area, we’ll need to wait for a close of the daily bar that broke that level. Remember that if price breaks the level but ends up being a tail pushed right back down into the channel, that is no good for us.
If a daily bar does close with authority above the level I mentioned, than I am going to take a long position there. I want to capture as many pips as possible with this break out trade, but I also do not want to let profit get away from me, so here is how I am going to manage my trade:
I am going to use a type of trailing stop to make sure that I can get the most out of this trade. To trail the stop, I am going to zoom into the 4 hour chart and use the bottom of the bars to trail my stop based on the last three bars. Nathan explains here how he uses a 3 bar stop loss, and I will be doing something similar in this trade:
I would do a similar trail to what Nathan explains in this video. Again, the reason for a trailing stop is to make sure that I don’t miss out on a huge move.
So, hopefully using that set-up and the trailing stop, you can make a very profitable trade when EUR/AUD does break out of this channel.
Thanks, and as always, please leave thoughts and comments!
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