Trend Strength Breakout Forex Trading Strategy

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Trend Strength Breakout Forex Trading Strategy

Breakout trading is probably one of the most exciting types of trading strategies. Breakouts are often followed by strong price movements in the direction of the breakout. Traders who caught the trade as a candle is breaking out of a support or resistance often find themselves having a huge gain early in the trade. This allows them to have lesser pressure while managing the trade and end up profiting on such trades.

Breakout trading is exciting, that is if the breakout was actually a breakout and not a fake out. Sometimes, a probable breakout candle would reverse right after price pokes beyond the support or resistance line. It would just breach support or resistance line for a candle or two and then reverse back to its original direction. Traders who took such trade setups are often trapped in a trade or end up having their stop loss hit. This is no fun at all.

So, how do we get to trade higher probability breakout setups? There are many ways to trade higher probability breakout setups. Some trade after a retest. Some trade only on strong momentum breakouts.

One way to trade breakouts is to trade it with the trend and with strong momentum. Trending markets move in a series of expansions and contractions. During the contraction phase, price tends to retrace towards the mean forming a minor support or resistance line. After the retracement, price would often break out of the support or resistance line and resume the trend.

Trend Strength Breakout Forex Trading Strategy trades on setups where the market is breaking out of a market contraction during a trending market condition. It also identifies whether the strength of the trend has resumed and trades only during such conditions.

5 SMA Trend Strength

5 SMA Trend Strength is a short-term momentum indicator which helps traders identify strong trending moves.

This indicator as a momentum filter. It displays lime bars to indicate a strong bullish momentum and red bars to indicate a strong bearish momentum. It also identifies weak momentum and plots yellow bars during such market conditions.

This indicator could work both as a momentum filter or a momentum entry signal. Traders who use it as a momentum filter would qualify trades based on the color of the bars. Traders who prefer to use it as an entry signal would take trades as the bars change color.

Because of the nature of this indicator, it is best to use it for short-term trades where the candle is closed on the next few candles. This is applicable for binary options. However, there are also situations where the signal would start a trend. During these situations, the trend may last a little longer allowing traders to profit a bit more.

Trading Strategy

This trading strategy is a combination of a trend following strategy and a momentum breakout strategy.

We will be basing our trades on the short to mid-term trend. To identify trend direction, we will be using a 20-period Exponential Moving Average (EMA) and a 50-period Exponential Moving Average (EMA). The trend will be based on how the moving averages are stacked. The market will be considered bullish whenever the 20 EMA is above the 50 EMA, and bearish whenever the 20 EMA is below the 50 EMA. The two lines should also have a considerable distance between them to indicate a strong trend.

We would then be waiting for price to retrace towards the area between the two moving average lines. This retracement would typically create a diagonal support or resistance line.

Trades are taken as soon as price breaks out of the diagonal support or resistance line. This should also be accompanied by the changing of the color of the Trend Strength bars, indicating a resumption of momentum in the direction of the trend.

Indicators:

  • 20 EMA (Green)
  • 50 EMA (Saddle Brown)
  • 5SMAtrendstrength (default setting)

Preferred Time Frames: 1-hour and 4-hour charts

Currency Pairs: major and minor pairs

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The 20 EMA line should be above the 50 EMA line.
  • Price action should be clearly trending up.
  • Price should retrace towards the area between the 20 EMA and 50 EMA lines.
  • A diagonal resistance line should be observed.
  • The Trend Strength bars should temporarily change to red during the retracement.
  • Price should break above the diagonal resistance line.
  • The Trend Strength bars should change to lime.
  • Enter a buy order on the confirmation of these conditions.

Stop Loss

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

Exit

  • Close the trade as soon as the Trend Strength bars change to red.

Trend Strength Breakout Forex Trading Strategy

Trend Strength Breakout Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The 20 EMA line should be below the 50 EMA line.
  • Price action should be clearly trending down.
  • Price should retrace towards the area between the 20 EMA and 50 EMA lines.
  • A diagonal support line should be observed.
  • The Trend Strength bars should temporarily change to lime during the retracement.
  • Price should break below the diagonal support line.
  • The Trend Strength bars should change to red.
  • Enter a sell order on the confirmation of these conditions.

Stop Loss

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

Exit

  • Close the trade as soon as the Trend Strength bars change to lime.

Trend Strength Breakout Forex Trading Strategy 3

Trend Strength Breakout Forex Trading Strategy 4

Conclusion

This type of strategy is a combination of a trend following strategy, momentum strategy and a breakout strategy.

Traders are trading with the trend while considering momentum. It also provides trade entries as the market retraces preventing traders from chasing price. Finally, it also allows traders to trade as price breaks out of a diagonal support or resistance increasing the likelihood of a strong expansive price movement.

This strategy works very well during trending market conditions. However, trading this on a ranging or choppy market often does not work. The key to trading this strategy well is in identifying trends and trading at the right breakout candle.

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