This trading strategy is a simple way of building long term wealth because there is no correlation in the market between the complexity of an indicator or method and its success.
In fact the opposite is true. Most of the world’s top traders who have made consistent profits have used systems that are essentially simple. Simple systems are the best because their logic is easy to understand and implement. If the system is easy to understand, it is easier for a trader to execute it with discipline. There is no point in having a system unless you have confidence in it, to trade it with discipline, even when faced with a losing run of trades.
There are some trades that are more valid than others and the probabilities of the breakout turning into a strong trend are greater. we need to look at some basic criteria for a evaluating breakouts in terms of their probability of success.
Generally, the more times a line of resistance or support has been tested the more important the violation will be if the breakout occurs. We generally never trade less than three tests. What I am trying to say is, you need a minimum of two to three relative equal highs and lows to have a true consolidation base.
The timeframe between the tests of resistance and support is also important, likewise the longer the support or resistance has been in place, the more valid the break will be when it comes. Trading breakouts is a great method of catching the really big moves that can pile up big profit – that is the aim of all traders. Every trader could use a breakout system if they want to. The fact, however is that they don’t. The fact that the bulk of traders don’t want to is the reason why the system works and will continue to work and make mega profits for those that understand the simple concept.
Once a clear break has occurred, the odds are the trend will continue in the direction of the break. If the trend reverses quickly, and goes back to the breakout point rather than continuing , the break is likely false. Stops should therefore be at or near the breakout point. Look for opportunity when the price or market is consolidating; the more the consolidation the more the volatility will be or breakout. Also check out for double tops or bottoms and candle sticks patterns that trade the same low. That will serve as the tunnel and you will be watching for any candle that will break any of the lines and make your trading decision as fast as possible.
The trade setup:
Insert E MA 200 as the trend line EMA 8 as the fast and EMA 20 is to confirm the breakout
Entry rule:
Once the price breaks through one of the trend lines and a current price bar closes outside the tunnel, place a buy/sell in the direction of the breakout. If price penetrates the trend line but did not close outside the tunnel cancel the previous trend line and draw another one according to the new conditions.
Exit rules:
You could set 30 to 20 pips or you could trail your profits by setting 5 to 10 pips below or above the trend line and apply trailing stops of 15 or 25 points, although it is believed that the price after the breakout from the tunnel will be more than the width of that tunnel, so expect more pips.
Happy trading.
