Advertisement

Free Automated Strategies (1 of 3): Trading Breakouts

DailyFX.com -

Talking Points:

  • Breakout strategies work best during high volatility

  • Strategy logic for Breakout2

  • Using Mirror Trader to automate this strategy

Throughout this 3-part article series, we are going to explore three different trading strategies, the market conditions they work best in, and how we can automate these strategies to run on our accounts for free. This first article we begin by looking at a breakout strategy that uses the Speculative Sentiment Index (SSI), Donchian Channel (DNC), and Average True Range (ATR) to trade high volatility markets.

To be alerted when automated strategy articles 2 & 3 are published, click here to join my email list.

When Can We Use a Breakout Strategy?

When support or resistance is broken and a breakout occurs, we want to see price move as violently as possible in the direction of the break. This will maximize our profit when trading a breakout strategy. Because of this, we prefer to trade a breakout strategy during times of strong market volatility. But how can we measure volatility?

There are a few tools we can use, but I think the easiest to read is our volatility meter located on our Technical Analysis page. Our analysts look at Forex option contracts and calculate how much traders think a currency pair will move compared to the past 90 days. We then list volatility in percentage terms, as seen below:

Learn Forex: DailyFX.com’s Technical Analysis Page - Volatility

Free Automated Strategies (1 of 3): Trading Breakouts
Free Automated Strategies (1 of 3): Trading Breakouts

(Created using DailyFX.com’s Technical Analysis Page)

When a currency pair has a volatility percentage greater than 50%, it is a candidate for trading using a breakout strategy. Any pairs with under 50% volatility, we want to avoid. By scanning this list each day, we should find a handful of pairs to trade. Next, let’s take a look at the breakout strategy’s trading logic.

What Are Breakout2’s Trading Rules?

The name of this strategy is called Breakout2. There are 3 primary steps to follow that have an increasing level of difficulty: filtering trade direction bias with SSI, entering our trade using DNC, and exiting our trade using ATR and a trailing stop.

Step 1. Filtering Trade Direction Bias Using SSI

SSI tells us the positioning of FXCM retail traders for each major pair. We can see the ratio of long traders to short traders and we can use this to determine what direction we should look to trade in. If you are not familiar with the concept of using SSI, check out my article, How to Use the SSI.

Using DailyFX Plus, we can see current SSI levels. Our filtering rules are as follows:

  • If SSI is greater than +1.22, we only look for short breakout trades

  • If SSI is less than -1.22, we only look for long breakout trades

  • If SSI is between -1.22 and +1.22, we do not look for any trades.

Learn Forex: DailyFX Plus’ SSI – Retail Trader Sentiment

Free Automated Strategies (1 of 3): Trading Breakouts
Free Automated Strategies (1 of 3): Trading Breakouts

(Created using DailyFX Plus’ SSI)

Step 2. Entering Trades Using Donchian Channel

The Donchian channel is an indicator add-on that can be downloaded from FXCMapps.com. It plots recent high and low price boundaries going back X amount of bars. We want to set this indicator on a 1-hour chart set to 24 periods. This will draw a line at the highest and lowest closing prices over the last 24 hours.

A buy trade is triggered any time price breaks through the upper line (while SSI is below -1.22) and a sell trade is triggered any time price breaks through the lower line (while SSI is above +1.22).

Learn Forex: Breakout Trade Entries Using Donchian Channel

Free Automated Strategies (1 of 3): Trading Breakouts
Free Automated Strategies (1 of 3): Trading Breakouts

(Created Using FXCM’s Marketscope 2.0 Charting Package)

Step 3. Exiting Our Trade Using ATR and Trailing Stops

The most complex step in the entire strategy is exiting our positions. We want to split our trade into 5 positions that will be managed with 4 stops, 4 profit targets, and a trailing stop.

Setting 4 Stop Losses:Using a 90-period ATR on a Daily chart, we want to set our stop losses every 0.5 ATR(90) from our entry price. So if bought the EURUSD at 1.3000, and the 90-period ATR on a EURUSD Daily chart was 100 pips, we would set our 4 stop losses at 1.2950, 1.2900, 1.2850 and 1.2800.

Setting 4 Profit Targets: Using the same method as above, we want to use a 90-period ATR on a Daily chart and set our profit targets every 0.5 ATR(90) from our entry price. So if bought the EURUSD at 1.3000, and the 90-period ATR on a EURUSD Daily chart was 100 pips, we would set our 4 profit targets at 1.3050, 1.3100, 1.3150 and 1.3200.

Setting a Trailing Stop: We want to set a Net Stop (for our entire position on the pair) on the opposing Donchian channel line. So if we opened a short position, our Net Stop would equal the upper Donchian channel line. If we opened a long position, our Net Stop would equal the lower Donchian channel line. We will need to manually update our Net Stop as the Donchian Channel line changes from bar to bar.

How Can We Setup Our Account to Trade Automatically?

Depending on your experience level and the amount of time you have a day to trade, you may or may not be equipped to trade this strategy manually. Fortunately for us, we are able to completely automate this strategy on our accounts with a few clicks of the mouse. It is actually quite easy to setup using a platform called Mirror Trader. Mirror Trader will look at SSI to determine what direction it will trade and it will set the stops, profit targets, and trailing stop at the appropriate levels upon opening the trade. The only thing it will not do is turn itself on and off and based on market volatility for each pair. It is your job to determine when to turn this strategy on and off.

Mirror Trader is a platform built specifically to copy strategies that other traders have developed, including the strategy I explained today, Breakout2. Below are the results of Breakout2 on the 13 available currency pairs it can be paired with over the last 90 days. Understand that past results do not guarantee future profits.

Learn Forex: Breakout2 Results Using Mirror Trader Over the Last 90 Days

Free Automated Strategies (1 of 3): Trading Breakouts
Free Automated Strategies (1 of 3): Trading Breakouts

(Past Performance is not indicative of future returns. Created Using Mirror Trader)

To add a strategy to our account, we need to log in to Mirror Trader by going to FXCM.com, clicking on Log In, and selecting Mirror Trader.

Free Automated Strategies (1 of 3): Trading Breakouts
Free Automated Strategies (1 of 3): Trading Breakouts

We can log in using our real FXCM account or by using a Mirror Trader specific demo account. (Note that existing FXCM demo accounts will not work with Mirror Trader. You will need to create a Mirror Trader demo account in order to log in to Mirror Trader with a demo).

Once we are logged in, we want to click on Strategies, Custom Filter (double magnifying glass icon), select Breakout2 from the Strategy name list, click Find, then click the “+” button for each currency pair we would like to run this strategy.

Free Automated Strategies (1 of 3): Trading Breakouts
Free Automated Strategies (1 of 3): Trading Breakouts

Since Breakout2 will manage 5 trades at a time, understand that the trade size you select will be multiplied 5x. So if you select 10k as your trade size, it will open five 10k positions each time it opens a trade.

In Conclusion

Trading a strategy profitably is not as easy as just following a set of entry and exit rules, we also need to take market conditions into account. We want to make sure we only use breakout strategies during times of high volatility. Also, taking advantage of trading automation allows us to use strategies without spending time on managing the trades ourselves. If you are interested in testing the above system using Mirror Trader, click here to create a free demo account.

Good trading!

---Written by Rob Pasche

To contact Rob, email rpasche@dailyfx.com.

Sign up for my email list to stay up to date with my latest articles and videos.

Start your Forex trading on the right foot with the Forex Fast-Track Webinar Series. This 4-part, live webinar course is the disciplined Traders’ Fast-Track to the Forex Market. Topics include:

  • Using FXCM’s award-winning trading platform

  • Calculating Leverage and reducing risk

  • Trading with a simple (yet effective) trading strategy

  • Maintaining for Forex account and enrolling in on-going education

This course is completely free, so sign up or watch on-demand today.

mailto:rpasche@dailyfx.com


original source

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.