Box Breakout Forex Trading Strategy

Breakout strategies are one of the types of strategies that profitable traders use. Although there are many different variations of a box breakout strategy, the fundamentals are still the same. Traders identify the highs and lows of the day or the first few hours of the day and trade on breakouts on either direction.

This version of the box breakout strategy marks the first few hours of the trading day which is during the Tokyo session. The high and the low of the session are then marked as support and resistance where we will be anticipating strong breakouts during the London or New York session.

Trades are considered based on the price action occurring on these areas. We will mainly be looking for strong momentum breakouts. In some cases, a retest could also be used to confirm the breakout. However, to make things much simpler, we will stick with the momentum candle breakout.

We will also be using an indicator that would automate the marking of the support and resistance line in order to simplify the strategy.

Box Breakout Indicator

Box Breakout indicator is a simple indicator which helps breakout traders automate their charting. It simply identifies the high and low within the preset period and marks both as a support and resistance.

This creates a box like structure which price would typically range during a ranging market condition. Price would usually oscillate within the structure until a significant market event would occur causing a strong momentum breakout on either side.

This indicator could be configured according to the specifications of the trader. For this setup, the box breakout indicator marks the first five hours of the trading day when the market is usually quiet.

Trading Strategy

This strategy simplifies box breakouts by using the Box Breakout indicator.

Some price action know-how would be required to trade this strategy. Only breakouts with strong momentum candles would be considered as a viable entry. These would be candles with big long bodies and small wicks.

Price action prior to the breakout would also be very beneficial. Congestions prior to the breakout is a good sign of a viable breakout entry, as well as price rejections on the area below the breakout would also increase the likelihood of a successful price breakout. In some cases, a breakout and a retest on the support or resistance line would occur, which is also a good sign of a start of a new trend.

We would also be using the five-period Exponential Moving Average (EMA) and the 10-period Simple Moving Average (SMA) to identify momentum. During a strong momentum price breakout, the area between the two lines would tend to expand. This would confirm the breakout trade setup.

This strategy is a day trading strategy. As such, we will be using the 15 minute time frame in order to enter trades more accurately.

Indicators:

• 5 EMA (Gold)
• 10 SMA (Green)
• box-breakout (default setup)

Preferred Time Frames: 15-minute chart only

Currency Pairs: major and minor pairs

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

• A strong bullish momentum candle should break above the resistance line.
• The 5 EMA line should be above the 10 SMA line.
• The area between the 5 EMA and 10 SMA line should widen.
• Enter a buy order on the close of the bullish momentum candle.

Stop Loss

• Set the stop loss a few pips below the entry candle.

Exit

• Close the trade as soon as the 5 EMA line crosses below the 10 SMA line.

Sell Trade Setup

Entry

• A strong bearish momentum candle should break below the support line.
• The 5 EMA line should be below the 10 SMA line.
• The area between the 5 EMA and 10 SMA line should widen.
• Enter a sell order on the close of the bearish momentum candle.

Stop Loss

• Set the stop loss a few pips above the entry candle.

Exit

• Close the trade as soon as the 5 EMA line crosses above the 10 SMA line.

Conclusion

Box breakout strategies are one of the favorite types of strategies used by professional traders. One popular variation of this strategy would be the London Breakout Strategy. That strategy is a bit more complicated though with more rules compared to this strategy.

Trades should also be done on high probability breakout markets. These are markets that are trending on the long-term and markets that are in a congestion phase on the short-term. It is best to scan the market for these types of conditions and have watchlist of high probability currency pairs which have a strong potential to breakout successfully. This would also mean that some technical analysis are done on the higher time frames and the breakout setup only acts as an entry trigger.

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