ZigZag Breakout Forex Trading Strategy

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ZigZag Breakout Forex Trading Strategy

Price action trading is gaining a lot of popularity lately. Many price action forex traders swear that it is the best way to trade the forex markets. This is understandably so. Most traders fail because they are trading on information that has already been capitalized on by the big players. Trading on signals that are too lagging could mean that you are trading for lesser potential profits with a higher probability that price would already reverse.

Price action traders do not have this setback or at least have less of it. Although price action could also be arguably a historical information that has already been traded, at least it is not as lagging as most slow-moving technical indicators.

Price action traders trade based on the patterns of price swings, candlestick patterns, and the characteristics of price action around key support and resistance areas. These methods allow them to be very responsive to what the market is doing.

Although price action trading is very effective, it is not for everybody. Not all could easily master identifying candlestick patterns, supports and resistances and read how price is reacting around these areas. This method is too subjective and those who have not mastered it would find it difficult to read the market’s next move.

ZigZag Breakout Forex Trading Strategy is a strategy that trades on price action, yet it also simplifies the process using a few simple technical indicators. This allows even new traders to trade with price action effectively.

Zig Zag First

The Zig Zag First indicator is an indicator which identifies points on the price chart where price has significantly reversed. This is based on reversals that are greater than a certain percentage threshold. Straight lines are then drawn connecting these points creating a zigzag like structure.

The Zig Zag First indicator simplifies the process of identifying market swing points. Swing highs and swing lows are connected based on what the indicator detects as a valid swing point.

This indicator is very useful for price action traders. Traders can now easily identify a trending market just by looking at the pattern of the swing points. Markets creating higher swing highs and swing lows are interpreted as bullish trending markets. Markets creating lower swing highs and swing lows are considered as bearish trending markets. Traders can also identify ranging markets by looking at the levels of the swing points.

Heiken Ashi Candlesticks

The word Heiken Ashi literally means “average bars” in Japanese. This name fits the Heiken Ashi Candlesticks perfectly.

The Heiken Ashi Candlestick indicator is basically an indicator which modifies the structure of a candlestick by averaging out the open and close of each candle. This creates a candlestick structure which changes color only when the short-term momentum or trend has reversed. However, the price action highs and lows are still visible because the indicator retains the same highs and lows as the usual Japanese candlesticks.

This setup paints white candlesticks to indicate a bullish momentum and red candlesticks to indicate a bearish momentum.

This indicator is very useful for traders who would want to use indicators to objectively identify short-term reversal points while still having the ability to identify price action based on the highs and lows of the candle.

Traders can simply use the changing of the color of the bars as a momentum reversal signal, which they could use a basis to enter or exit a trade.

Traders can also visually see the small fractals or swing points where they can trail their stop losses.

Trading Strategy

This strategy is a breakout trading strategy which incorporates the use of the Zig Zag First indicator and the Heiken Ashi Candlesticks to objectively identify high probability trade setups.

The Zig Zag First indicator will be used to identify significant supply and demand zones or horizontal supports and resistances based on the swing highs and swing lows identified by the indicator. Traders can mark a horizontal support or resistance line as soon as the Zig Zag First indicator identifies a swing point.

Then, we wait for price to breakout from the support or resistance line with strong momentum.

After the breakout, we should wait for price to pullback or retest the broken support or resistance line. This should cause the Heiken Ashi Candlesticks to temporarily indicate a reversal color.

Trades are considered valid as soon as the color of the Heiken Ashi Candlesticks indicate the direction of the breakout.

Indicators:

  • ZigZagFirst
  • Heiken Ashi

Preferred Time Frames: 30-minute, 1-hour, 4-hour and daily charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • A horizontal resistance line should be identified based on the Zig Zag First swing high.
  • Price should break above the resistance line.
  • Price should retrace and retest the broken resistance line causing the Heiken Ashi Candlesticks to temporarily change to red.
  • Enter a buy order as soon as the Heiken Ashi Candlesticks change to white.

Stop Loss

  • Set the stop loss at the support level below the entry candle.

Exit

  • Trail the stop loss on the fractal below price until stopped out in profit.
  • Close the trade as soon as Zig Zag First indicator identifies a swing low.

ZigZag Breakout Forex Trading Strategy

Sell Trade Setup

Entry

  • A horizontal support line should be identified based on the Zig Zag First swing low.
  • Price should break below the support line.
  • Price should retrace and retest the broken support line causing the Heiken Ashi Candlesticks to temporarily change to white.
  • Enter a sell order as soon as the Heiken Ashi Candlesticks change to red.

Stop Loss

  • Set the stop loss at the resistance level above the entry candle.

Exit

  • Trail the stop loss on the fractal above price until stopped out in profit.
  • Close the trade as soon as Zig Zag First indicator identifies a swing high.

ZigZag Breakout Forex Trading Strategy 2

ZigZag Breakout Forex Trading Strategy 3

Conclusion

Breakouts of swing highs and swing lows are viable trade setups. It allows traders to trade with the momentum caused by the breakout, which could then result in a trend.

However, identifying the correct support or resistance line is quite difficult and so is identifying the correct pullback.

This strategy simplifies the process by systematically providing viable swing highs and swing lows which could be a basis for supports and resistances. It also simplifies the process of identifying pullbacks through the use of Heiken Ashi Candlesticks.

Traders can now easily trade breakout setups without the difficulty of identifying the correct swing points.

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