Momentum Breakout Bars Forex Trading Strategy for MT5

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Momentum Breakout Bars Forex Trading Strategy - Buy Entry

Momentum Breakouts are market scenarios wherein price action would break strongly outside a market range. These momentum breakouts typically develop at the end of a tight market congestion since this condition often represents the start of a market expansion phase. Momentum Breakouts are also typically followed by strong market runs which may develop into a trend.

Seasoned Momentum Breakout Traders often trade these market scenarios with the assumption that the price would continue in the direction of the momentum.

Let us discuss how we can systematically trade momentum breakouts using two technical indicators.

Breakout Bars Trend Indicator

The Breakout Bars Trend Indicator is a momentum technical indicator developed to help traders spot and identify potential momentum breakouts and identify the direction of the immediate market trend. This indicator was developed as an alternative to moving average indicators for identifying the trend direction.

The Breakout Bars Trend Indicator is based on the iMovment Indicator and was developed as a hybrid Linear Reversal Indicator. These two indicators detect momentum and trend direction using a complex algorithm that uses data from the open, high, low, and close of each price candle. However, the difference between the two is that unlike the movement Indicator, the Breakout Bars Trend Indicator uses the actual high and low of a price, which is its extremum, as the delta or parameter for identifying reversals, momentum, and trend.

The Breakout Bars Trend Indicator overlays price bars on each price candle, modifying the color of each candle. Each candle color represents a different indication, which could be a Breakout Open, Breakout High or Low, or a Neutral Candle that has not reversed against a prior trend.

A blue candle indicates a bullish Breakout Open Candle, while a royal blue candle indicates a bullish Breakout High Candle. A deep sky blue candle on the other hand indicates a bearish candle within a bullish momentum market.

Inversely, a red candle indicates a bearish Breakout Open Candle, while a tomato candle indicates a bearish Breakout Low Candle. Lastly, an orange candle indicates a bullish candle within a bearish momentum market.

Among all these colors, the blue and red candles are most indicative of a strong momentum breakout. The blue candle typically forms as a bullish momentum candle, while the red candle typically forms as a bearish momentum candle.

Breakout Bars Trend Indicator

Bollinger Bands

The Bollinger Bands Indicator is a volatility indicator that was developed by John Bollinger in the 1980s. This indicator is often used by financial traders to objectively assess the market’s trend, momentum, and volatility, as well as overbought and oversold market levels.

The Bollinger Bands is an envelope type of indicator that plots three lines forming a band-like structure that typically wraps around price action. These three lines are its middle line and its two outer lines drawn above and below the middle line.

The middle line of the Bollinger Bands is a Simple Moving Average (SMA) line which is usually preset to calculate for 20 bars. The outer lines, on the other hand, are standard deviations of price drawn above and below the middle line, which is usually calculated as 2 standard deviations. However, these variables may also be modified within the indicator settings.

Given that the middle line of the Bollinger Bands is a 20 SMA line, this indicator can be used as a trend indicator. Traders may easily identify uptrend markets whenever price action is generally above the middle line. Downtrends on the other hand may also be identified whenever price action is generally below the middle line.

This indicator is also usually used as a volatility indicator. The Bollinger Bands typically expand whenever the market is in a market expansion phase and contracts whenever the market is in a market contraction phase. Expansions typically indicate high volatility, while contractions typically indicate low volatility.

Traders also use this indicator as an overbought and oversold indicator. Price levels above the upper Bollinger Band line are considered overbought, while price levels below the lower line are considered oversold. Both market scenarios are price conditions for a potential mean reversal as price action usually rebalances after an overextended price level.

Lastly, traders may also use this indicator as a momentum breakout indicator. Momentum candles closing outside the Bollinger Bands after a tight market contraction typically indicate a momentum breakout.

Bollinger Bands

Trading Strategy Concept

This trading strategy is a Momentum Breakout Strategy which trades on momentum breakout scenarios that develop right after a tight market contraction or congestion. This strategy uses two technical indicators which allows us to objectively assess market contraction phases and identify momentum breakout scenarios.

In this strategy, the Bollinger Bands Indicator is used primarily to help us identify market contraction phases. This can be observed on the price chart as price action which is typically within a tight contracting Bollinger Band. From there, we could start observing for momentum breakouts.

The Breakout Bars Trend Indicator is used to help us objectively qualify momentum breakout candles based on the color of the bars. What we are looking for are blue or red candles which indicate a Breakout Open Candle. These candles will be our momentum breakout entry signals.

Buy Trade Setup

Entry

  • Observe price action and the Bollinger Bands for a tight market contraction.
  • Open a buy order as soon as the Breakout Bars Trend Indicator plots a blue bullish momentum candle closing above the upper Bollinger Bands line.

Stop Loss

  • Set the stop loss on the fractal below the entry candle.

Exit

  • Set the take profit target at 2x the number of pips risked on the stop loss.

Momentum Breakout Bars Forex Trading Strategy - Buy Entry

Sell Trade Setup

Entry

  • Observe price action and the Bollinger Bands for a tight market contraction.
  • Open a sell order as soon as the Breakout Bars Trend Indicator plots a red bearish momentum candle closing below the lower Bollinger Bands line.

Stop Loss

  • Set the stop loss on the fractal above the entry candle.

Exit

  • Set the take profit target at 2x the number of pips risked on the stop loss.

Momentum Breakout Bars Forex Trading Strategy - Sell Entry

Conclusion

This type of trading strategy is commonly used by momentum breakout traders. It is an effective trading strategy once used at the right time and in the right market condition. Most successful momentum traders also trade momentum breakout strategies at key time windows using time and price theories, during times when trading volume is expected to spike. Traders should practice this trading strategy first before implementing it to get a feel of how it should be used.

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