Advance Forex Strategy – The 4Hour Break Out Method[PART 2]

Today we shall be covering the system rules and live examples…Click Here To Read The Part 1 of This Tutorial,so we can all be on the same page…As soon as you’re done,you can come back to this page to complete the reading!

System rules:

Let’s  run  through  the  simple  rules  of  this  entry  technique  and  then look at some trade examples:

1.  Monitor  your  pairs  for  an  obvious  up/down  trend  (check  the 30ema for slope direction).
2.  Once you have a trend in place look for consolidations, support in a down trend and resistance in an up trend.
3.  Wait for a break of the consolidation, this is usually in the form of a large bar indicating volume.
4.  Watch for a retrace back to the support/resistance line that was just broken (sometimes it may happen fast so keep an eye on the lower timeframes if you can).
5.  If you get a retrace enter on the touch of the support/resistance line that was just broken (you can use pending orders if you are not able to be at you pc).
6.  Place your stop well behind the support/resistance line.
7.  Move  your  stop  to  break  even  after  you  are  in  profit  by  the same amount you risked.
8.  Stops can be trailed by a pip amount or trailed manually behind bar lows in a up trend and bar highs in a down trend.

The  first  thing  we  need  to  know  is  if  price  is  in  an  up  trend,  down trend  or  going  side  ways.  The  gauging  of  the  trend  direction  is  not mechanical, you need to look at the overall picture, stick to the 4 hour chart and just look to see where price is in relation to the 30ema.The 30ema is where price tends to be around on a breakout.

Trade Examples:

Lets  look  at  a  4H  chart  of  the  EURUSD  so  I  can  explain  a  little further.

 [click on image to view]

As you can see the above chart is in a clear up trend, price is moving away from the 30ema and staying above it most of the time indicating a  strong trend.   Once  we  have  a  clear  picture  of  the  trend  direction we  look  at  support/resistance  areas  for  consolidation,  this  can  be trend lines or horizontal lines for double tops/bottoms.

If you are not familiar with trend lines and support and resistance then please do a quick search on Google, you will have plenty of reading on the subject too keep you busy for hours.

Look at the bottom red line on the chart above, this is the resistance created  at  the  double  top.  After  many  attempts  price  finally made  a break of the double top and we had ourselves a trade opportunity.Sometimes you will have to take the trade on a lower time frame as the retrace is too fast to notice properly on a 4H chart. Lets see the 30M chart of the trade above.

[click on image to view]

The chart above is still the same trade as the previous chart except now  we  have  moved  to  the  30M  timeframe.  Normally  I  would  not have  bothered  to  do  this, I  would  have  taken  the  trade  from the  4H chart  however  it  is  simply  easier  for  you  to  see  the  retrace  on  this particular trade. Not  long  after  the  break  there  was  a  retrace  back  to  the  resistance line which has now become support at the red line.

Once price touches the red line its time to pull the trigger, enter a buy trade and place your stop 20-25 pips behind the red support line. Are  you  starting to see the  $ signs  yet?  The  beauty of this setup  is the risk reward ratio is huge at around 1-3, so what does this mean to us?

1-1    = 50% wins to break even.
1-2    =33% wins to break even.

1-3    =25% wins to break even.So as long as you win more than 25% of your trades you are making money! Lets have a look at another example of a trade setup, this time I will show you the same setup on a trend line breakout.

[click on image to view]

 

On the above chart there is a lovely upwards sloping trend, price is clearly above the green 30ema and is consolidating below the trendline. If you look carefully at the breakout on this chart you will see that price shot up then retraced as the candle closed. On the opening of the  next  candle  price  took  off  to  the  moon,  lets  checkout  the  lower time frame again.

[click on image to view]

Above  is  a  30M  chart  of  the  same  setup,  now  you  can  see  the breakout and retrace perfectly.

This entry technique requires a lot of patience as many times you will miss a huge move because price didn’t retrace back before taking off in the direction of the trend.

At these times there is nothing we can do but look for another setup, remember we are in this business to make money not give it away, don’t get caught up in the moment and start trying to trade the initial breakout!

The beauty of this entry technique is that your trade generally moves into  profit  very quickly.  Once  you  gain  experience  trading this setup you will be able to spot them a mile off.

When you enter a trade at the retrace you should be in profit within the  next  couple  of  candles  if  not  sooner,  if  there  seems  to  be  no movement then get out with a very small loss. Try to keep you losses as small as possible on trades that don’t look right.

Below is  a  trade  on  the  USDCAD I  would  like  to show  it  to  you  because  it  is  a  great  example  of  the  setup  I  am explaining.

[click on the image to view]

Above  was a  live  trade example  on  the  USDCAD,  as  you  can  clearly see the pair is in a downtrend and below the 30ema.

I have been keeping an eye on this pair for the past few days since there was enough low points to create a trend line (you need at least 2   points   to   create   a   trend   line,   3   is   better).   Price   broke   down yesterday  during  a  news  announcement,  and  then  retraced  today back to the trend line where I opened my position.

The green dashed line is my entry and the red dashed link is my stop, I placed the stop further away than I normally would on this trade due to the fact that price could test the major trend line that is drawn on the chart. The trade rocketed into 23 pips profit and then came back against me a little when I took the screen shot of the trade.

News is due out following morning so once I’m in profit by 30 pips I will move my stop to break even. I am targeting the previous low point on the chart which is 90 pips away and if that is broken then I think the down trend will continue and I will hold on for a few hundred pips.

This  setup  can  also  be  used  on  daily  charts  with  very  good  results although I tend to stick to double tops as they perform far better than trend  line  breaks.  This  is  due  to  the  fact  that  every  trader  place’s  a trend line in a different place so the breakouts are less reliable with everyone   seeing   the   breakout   in   a   different   place   where   as   a horizontal line can not be misinterpreted so easily.

Ok more examples you need to learn this stuff, let’s check out a setup on a daily chart to see what I’m talking about.

[click on the image to view]

 

This is a recent trade I took on the EURUSD, a very clear double top was  formed  a  while  back  and  I  have  had  my  eye  on  it  ever  since.

After   a   huge   drop   off   price   fought   back   and   broke   through   the resistance created by the double top. Two days later price fell back to the   support   line   (resistance   becomes   support   once   price   breaks through) where I had my buy position waiting with a small stop loss of 40  pips.  The  trade  only  went  against  me  by  about  20  pips  before making my trading account much happier.

I  would  like  to  point  out  that  with  horizontal  support  and  resistance lines you can use smaller stops than with a trend line I find that if the horizontal  line  is  severely  broken  I  get  out  of  the  trade  as  soon  as possible because the chance of the trade being a success is almost none existent….

I am going to stop for now,my next post will be on the concluding part…

You Can Read: “The Advance Forex Strategy – The 4Hour Break Out Method[PART 3]” Here!

So feel free to use the comment box below!