The Patience Breakout Strategy

Screen Shot 2014-06-17 at 11.12.19


Video Transcription:

Hey traders, welcome to video 19 of the Advanced Forex Strategies course. This is Cory Mitchell. In this video, we’re looking at the patience breakout strategy. It can be used on all timeframes. Brought to you by

So trend trading is where the money breakouts provides a way to enter that next trending move but with so many false breakouts, buying at the breakout point isn’t always wise. So we’ve covered that in future videos. You can just buy on a breakout which is how a lot of traders trade. Yet it’s not a very high probability trade simply because there is potential for a lot of false breakouts.

So the patience breakout strategy takes that away. It allows the price to breakout, so we don’t take a trade when it breaks out and then entering a trade when the price pulls back. We enter the trade when the price pulls back to near the breakout point. So we have some confirmation of that breakout is legitimate.

This provides a [inaudible 00:01:03] stop. The risk of a false breakout is reduced. You get a similar price to what the original breakout would have been, and we have more information to work with. So a patience breakout strategy is used following a breakout of a chart pattern. It should always be applied to ranges. Trading range breakouts can be very difficult and potentially applied to wedges, head-and-shoulders, and triangles.

Wedges, head-and-shoulders, and triangles you can just use a normal breakout, but if you miss it, you can also use this one. So this one I would say definitely apply to ranges and for wedges, head-and-shoulders, and triangles, you have the option of using this or the typical breakout strategy where as soon as the price breaks out of the pattern, you trade it.

So we let the price breakout. It must move outside the pattern by at least the distance of the support and resistance area. This gives us some confirmation that that breakout is legitimate, and I’ll show you how to measure that. If the above is true, place an order to enter several pips from the original breakout price. Be more aggressive if you have an extremely aggressive and large breakout.

If the former is not true, then no trade, and you’re going to actually going to watch for false breakouts which we did a video on. We have two option targets. You can use 1.6, 2.6, 3.6 times the risk exiting a portion of your position at each one. So if you have a 10 pip risk, you’re going to exit at 16 pips, 26 pips, 36 pips moving forward as the trade progresses or you can use the distance measurement target based on the height of the pattern. So we covered this in the head-and-shoulders and triangles videos. The stock goes just outside the former pattern preferably tucked behind a recent swing low for a break higher or a recent high for a break lower.

So we’re going to just look at a couple of examples. This is a fairly simple concept compared to some of the other things we’ve covered. So here I have, as you can see, a big triangle pattern in the Euro GAPY. This is a four-hour chart. So we have this big wedge going on. Price consolidating and it eventually breaks out. So we could trade this breakout. The only problem is at this far right of the chart, it’s very hard to tell if this is going to be legitimate and keep running or if it’s going to snap back and continue to do this channeling which it has done for over a month.

So we just use the breakout strategy. Our stops are going to have to be somewhere up in here. If we put it in here, it’s quite likely to get stopped out. So it’s a little bit more of a risky trade just to trade the breakout on a big triangle like this that’s been in place for a long time.

Let’s zoom in again. So what we’re looking for is a strong breakout. We used the support areas or resistance areas to help us establish that. So you can grab a sheet tool and just highlight how one of the resistance or support areas, in this case, because it was a breakout lower. So we can see the price stalled in this area here, a similar size here. You can see this is where it stalled. The same with here, it was a little bigger here.

So that is basically the area that it’s taking to stop the price. So we want to see a breakout at least that much. So we can just put it on the outside of the pattern. We see the price does move beyond that so this is not like just a new support area. It’s broken through something. Now we are looking for, so this means we can go short since we have this strong enough breakout. And we’re looking to go short as the price pulls back into the old area.

So that means that we’re not always going to get signals. If this just kind of moved across here and dropped, we would have not gotten a signal. So we need this pull back. In this case, it pulls back almost right to the wedge line which won’t always happen. So we’re going to need to decide where we’re going to place our order. I will typically place it, we’re seeing quite a bit of movement here, that’s about a 222 pip move, so I’ll probably, in this case, place it about 20 pips below the wedge line.

It also depends on how you draw it a little bit. That’s why I’m not going to give you an exact measurement where to put it. Like other strategies, it’s going to take a little bit of practice and customization to get to a point where you feel comfortable putting it with your order.

You could have also used something like a pocket strategy where we can see this little pause here. So you can put your order right below that expecting a pullback to it and a continuation lower. If you have no real recent swing highs, that’s where we would enter. We would be looking to enter right about there. In this case, since there was a big move 20 pips, for a smaller move on a 5 or 1 minute chart, you might want to put it 1 or 2 pips outside. So if this was a 15 minute chart and this was about a 20 pip move, you might just want to put it 1 or 2 pips below that old pattern.

As for our stop, this was a very sharp move. There is no real place to put a stop behind a recent low. So one trick we could use is once again, use that support area. So we can see that’s roughly the size of that support area where the price stalls out. Put that inside the pattern and place the stop just above it.

So this is only if there is no really relevant swing high or low to place an order behind. We could place a stop up here, but to me, that’s too much risk, that’s if we’re entering down there. That’s a 170 pips in. we don’t really need to give it that much room.

After this breakout, it should pretty much stay outside the pattern. It might come in a little bit. But if it’s going that far inside the pattern, probably not a legitimate breakout anymore and we do not want to be in that trade, so this is kind of the worst case scenario if we have nothing else to base it on. Just get a bit of reference from former support areas, resistance areas.

So we can see up there, too, a little bit bigger out there, that’s our whole resistance area. We probably don’t even need to give it that much room. So we’re going to be a little bit more conservative with measuring these, and that’s just about half way in. So if the price comes back in here, it’s probably not a legitimate breakout and will be stopped out and that’s fine.

So our target now can be based on just 1.6, 2.6 times the risk. So we’re entering here, stop up here. In this case, we’re looking at rounding it off to about 100 pips per risk. So we would be looking to get out at our staggered 1.6 times the risk so 160 pips, 2.6 times the risk, 260 pips or 360 pips. So as this continues to wind down, we would have been out of our first target right about there. So that was 160 pips, and we’d be looking for this to continue to the down side.

The other option is to look at the size of the overall pattern, not including extremes. So in this case, I would be fairly conservative not using that extreme, looking more at this area here. That is measured from the breakout point, and we would be looking for a move eventually down to about there. So a little bit of ways to go in this one.

Here is another one. This is not a very long lasting USD/JPY four-hour triangle. As you can see, we just have the minimum two swings. Quite often we’ll see triangles with quite a few more swings but this one did breakout after two. So instead of just taking this breakout right here when it first appeared. We can do that or we can wait for a breakout and then a pull back.

So once again to see if the breakout is legitimate, we’re going to size up the resistance and support areas of the triangle. So we can see the price took about this much space to really stall out and start moving back in the other direction. So that gives us kind of a gage of how the price is moving. So this one we can’t call a legitimate breakout quite yet. We’re going to want to see it move above this box.

So this is a potential trade in the making if this moves up above this box, then we can just get rid of that, and we’re going to look to enter. So it’s going to go up, and we will buy on a pullback toward this old triangle pattern. So we’re probably going to look to pick it up in about here.

This last wave, at that point would have been about 100 pips again, so we can put it 15 to 20 pips above this old trend line would probably be pretty good, or we can see, we have this slight pause again so this would be right in the pocket of that slight pause there. So this would be our entry point looking for a long and expecting the price to continue up that way.

Stop once again, no real ideal place for it. The typical stop is placed outside the pattern on the opposite side. We can use the little trick I taught you that is our resistance and support area. Then from the breakout price, we could use it which would put us still just outside the triangle. So that would be our stop and our targets would be based on 1.6, 2.6, 3.6 times the risk or the height of the pattern.

If we happen to get an entry point right here, we’d be looking at about 42 pips of risk, so multiply that. Take three entries for whatever you’re using, micro lots, mini lots, and just get one out at 1.6 times the risk, 2.6 times your risk, 3.6 times your risk, or you can use what we call the measured move, looking at the height of your pattern. So I would go probably about where these two, not counting that little extreme on the end, add that to the breakout price, and we’re looking for a target right about there.

So a different way to look at chart patterns instead of just trading the breakout, look for a strong move outside that pattern which we could use by just gauging these former support and resistance areas and making sure the price moves outside of it. So this one hasn’t quite moved outside of it yet, so we need a bit more movement to confirm that signal.

On ranges, we’re going to always want to do this. So here is an example of a range. We can see this false breakout here could have likely been saved from this one had we used this method. So it’s not absolutely necessary that you it, but it is quite beneficial especially on ranges, triangles, wedges, head-and-shoulders patterns, it is an option.

So a lot of review entering. Enter following a sizable breakout on a pullback to the breakout area. So we’re waiting for that move that’s at least the size of a supported resistance area that we had within the pattern. Then when that price pulls back, we’re looking to enter. The stop goes inside the pattern, preferably tucked behind a recent high or low, or we can use the little trick I taught you when that’s not available. Measure out those support and resistance areas that were in the pattern and tuck your stop that much inside the pattern.

Exit based on 1.6, 2.6, 3.6 times risk or the measured distance target based on the type of pattern. Only risk 1% of your account in one pair that way extreme losses won’t significantly draw down your account. Trading involves risk and loss. Only trade with capital you can afford to lose and make sure you test this out before using it with real money.

This is, once again, as we move through these advanced strategies, you’re finding likely that everything as I said before is more guideline based as opposed to exact rules. Because the market is dynamic, each movement is going to be a little different. Each pair is going to be a little different. So we need to go and practice and decide how we’re going to place our stops, our entries, which target method we’re going to use, and eventually we become very familiar with all of these concepts, and it becomes much easier. So get in there and practice.

Until next time, happy trading.


More About

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

View Posts - Visit Website

Comments are closed.