This strategy is quite simple, nothing new really. It's basically a simple method of breakouts based on two premises:
-When an asset is in a strong bullish/bearish trend it tends to stay in that way unless there is something in the market that makes the price change its direction. In the Forex market,for example, there are often major trends that last for weeks and months which can be used to trade with the breakouts that occur in the support/resistance. If the market is bullish we must look for breakouts of resistance but if the market is bearish we must look for breakouts of support.
-In markets with a sideways trend, the best recommendation is to avoid the use of breakouts to trade because they tend to produce many false signals under these conditions. In this case the best thing to do is to wait until the market is clearly bullish or bearish.
In the following two examples we can see two graphs where the asset price is in a clear trend, in which are produced a series of breakouts that can be exploited by the trader:
This is a very simple and yet profitable trading system. Many traders base their trades in breakouts of resistance or support. This is because these breakouts usually are the beginning of strong movements and also are very easy to follow.
As simple as it is, this trading system can be used to operate with any instrument.
- A daily price chart.
- A moving average (MA) chosen by the trader as a "marker" of the trend. When the market has no trend (sideways market) the MA slope is 0.
Trading System Rules
If the market is in a bullish or bearish trend indicated by the MA or other trend indicator we can do the following:
- If the price breaks a resistance or support we can wait until the close of the candle. If the candle close offside the breakout we can open a position at the opening of the next candle in the direction of the breakout. For example, if the price breaks a resistance in a bullish trend the trader can open a long position.
- We can put a stop loss a few pips below the broken resistance or above the broken support. However, the number of points risked in the trade depends on the trader´s risk appetite.
Additional Notes on the Trading System
- As we mentioned before, the sideways markets produce a lot of false signals because there are a lot of false breakouts (fakeouts). For this reason we must avoid the use of this strategy in a market with no clear trend.
- We recommend the use of an additional trend indicator which help us to identify the current market trend.