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How do YOU enter breakouts?

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Market Wizard
Berlin, Europe
Trading Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
Fat Tails's Avatar
Posts: 9,794 since Mar 2010
Thanks: 4,235 given, 26,377 received

Breakouts often fail when you enter at the wrong time....

A breakout trade requires that

- price is stuck in a consolidation
- volatility is low and you expect volatility to rise

For example the famous opening range breakout feeds on the conviction that volatility will rise, once the session is open. The squeeze trade detects that price is stuck in a consolidation by comparing the standard deviation to the average true range over a period of N bars.

Both the opening range out trade and the squeeze trade cannot exactly predict to which side the breakout will actually occur. This sometimes depends on scheduled news, in other cases you will need to wait for the failure on one side to get the opposite scenario validated. It is important to consider to reverse a breakout trade if it fails to one side. It might be firing off the opposite side, provided that volatility stays high enough to fuel the move.

The simple Donchian Channel breakout trades as used by the Turtles are probably history, as that type of trade has attracted to many predators - called Turtle Soup, etc. - which made it impossible.

I still believe that it is possible to trade intraday breakouts, provided that you know

- at which time of the day there is a higher probability for a breakout
- what price move can be considered large enough for confirming that a breakout had happened

Breakout trades are low probability trades and should therefore be only be taken with a high reward to risk ratio (for example R-Multiple > 3 or 4).

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