TRADE THE BREAK Time Frame Indicators Currency Pairs
STRATEGY 4: TRADE THE BREAK In the previous strategy, we discussed a method to trade the market when prices fail to close above resistance or below support. In trade the break, we see exactly where to place our entries and exits for both short and long positions. The biggest difference between trade the break and fade the break is that for trade the break, prices have to close above resistance or below support. For this strategy, the trick is not so much in the entry price but in the stop loss. Many retail traders have no problem identifying areas of entry since the directional bias is to follow the momentum. However, the correct placement of the stop loss is what separates winners from losers. You see, as with the previous fade the break strategy, both retail and institutional traders closely watch areas of support and resistance. More often than not, these areas are the biggest battlegrounds between these two groups of traders. This is why prices sometimes reverse quickly once they break above resistance or below support. When we learn how to place the stop loss correctly for these trades, many potential “losers” can in fact turn into winners. Let’s get right into it.
Time Frame Trade the break works with the 15-minute (M15) or 30-minute (M30) candle. This means that each candle on the chart represents 15 minutes or 30 minutes of price movement.
Indicators No indicators are used for this strategy.
Currency Pairs This strategy is suitable for all currency pairs listed on the broker’s platform, especially the seven major currency pairs of: EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD
Strategy Concept Trade the break is all about momentum. A big clue is seen when prices close above resistance or below support. This clue tells us that momentum is building strongly on one side. When prices close above resistance, that candle is called the breakout candle. A long trade is then taken at the opening price of the next candle. The stop loss is placed below the midpoint of the prior range because we do not expect prices to fall back below that point. When prices close below support, that candle is also called the breakout candle. A short trade is then taken at the opening price of the next candle. The stop loss is placed above the midpoint of the prior range because we do not expect prices to rise above that point.
Long Trade Setup We use the AUD/USD on M15 time frame to illustrate long trades. Here are the steps to execute the trade the break strategy for long: 1. Use at least two lows and two highs to identify the support and
resistance levels. (See Figure 7.7.) 2. Identify a candle that closes above the resistance. This is the breakout
candle. (See Figure 7.8.) 3. Enter long at the opening of the next candle. 4. Set the stop loss at the 60% mark of the range (distance between the
support and resistance) below the resistance. In this example, the distance between the support and resistance is 41 pips; the stop loss is set at 25 pips below the resistance.
FIGURE 7.7
Use Two Lows and Two Highs to Identify Support and Resistance Levels
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.8
Identify a Candle that Closes Above Resistance
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
5. Set two profit targets for this trade. The targets are set at a risk to
reward ratio of 1:1 and 1:2 respectively. Since the stop loss is 44 pips (distance between the EP and the SL), the first profit target will be 44 pips, and the second profit target will be 88 pips. (See Figure 7.9.)
FIGURE 7.9
Profit Targets for This Trade
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.10 Trade Hits Profit Targets Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
From the long example in Figure 7.10: Entry price = 1.0351 Stop loss = 1.0307 Profit target 1 = 1.0395 Profit target 2 = 1.0439 The risk for this trade is 44 pips, and the reward is 88 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Short Trade Setup We use the AUD/USD on M15 time frame for illustrating short trades. Here are the steps to execute the trade the break strategy for short: 1. Use at least two lows and two highs to identify the support and
resistance levels. (See Figure 7.11.) 2. Identify a candle that closes below the support. This is the breakout
candle. (See Figure 7.12.) 3. Enter short at the opening of the next candle. 4. Set the stop loss at the 60% mark of the range (distance between
the support and resistance) above the support. In this example, the distance between the support and resistance is 42 pips; the stop loss is set at 26 pips above the support. 5. We set two profit targets for this trade. The targets are set at a risk to
reward ratio of 1:1 and 1:2 respectively. Since the stop loss is 31 pips (distance between EP and SL), the first profit target is 31 pips, and the second profit target is 62 pips. (See Figure 7.13.)
FIGURE 7.11
Use Two Lows and Two Highs to Identify Support and Resistance Levels
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.12
Identify a Candle that Closes Below Support
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.13
Profit Targets Set for This Trade
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
From the short example in Figure 7.14: Entry price = 1.0498 Stop loss = 1.0529 Profit target 1 = 1.0467 Proft target 2 = 1.0436
FIGURE 7.14 Trade Hits Profit Targets Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
The risk for this trade is 31 pips, and the reward is 62 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Strategy Roundup As a trader, our job is not to predict but to react. In other words, we should not second-guess where the market is going and execute trades based on assumptions. Whenever the market approaches resistance or support levels, traders tend to jump in prematurely, which can yield disastrous consequences when the markets don’t go the way we want. Instead, a better option is to wait for the story to unfold. It certainly pays to wait for a confirmation before jumping onboard the breakout bandwagon. The confirmation comes in the form of the breakout candle that closes above the resistance or below the support. This is the market’s way of telling us that it has enough momentum to continue the run. By now, you must have realized that the two strategies—fade the break and trade the break—work hand in hand. Both strategies require us to pause and wait for a confirmation candle before deciding what to do. These candles are either false-break candles or breakout candles. With these two strategies, we can take a trade regardless of market direction.
Time Frame Trade the break works with the 15-minute (M15) or 30-minute (M30) candle. This means that each candle on the chart represents 15 minutes or 30 minutes of price movement.
Indicators No indicators are used for this strategy.
Currency Pairs This strategy is suitable for all currency pairs listed on the broker’s platform, especially the seven major currency pairs of: EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD
Strategy Concept Trade the break is all about momentum. A big clue is seen when prices close above resistance or below support. This clue tells us that momentum is building strongly on one side. When prices close above resistance, that candle is called the breakout candle. A long trade is then taken at the opening price of the next candle. The stop loss is placed below the midpoint of the prior range because we do not expect prices to fall back below that point. When prices close below support, that candle is also called the breakout candle. A short trade is then taken at the opening price of the next candle. The stop loss is placed above the midpoint of the prior range because we do not expect prices to rise above that point.
Long Trade Setup We use the AUD/USD on M15 time frame to illustrate long trades. Here are the steps to execute the trade the break strategy for long: 1. Use at least two lows and two highs to identify the support and
resistance levels. (See Figure 7.7.) 2. Identify a candle that closes above the resistance. This is the breakout
candle. (See Figure 7.8.) 3. Enter long at the opening of the next candle. 4. Set the stop loss at the 60% mark of the range (distance between the
support and resistance) below the resistance. In this example, the distance between the support and resistance is 41 pips; the stop loss is set at 25 pips below the resistance.
FIGURE 7.7
Use Two Lows and Two Highs to Identify Support and Resistance Levels
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.8
Identify a Candle that Closes Above Resistance
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
5. Set two profit targets for this trade. The targets are set at a risk to
reward ratio of 1:1 and 1:2 respectively. Since the stop loss is 44 pips (distance between the EP and the SL), the first profit target will be 44 pips, and the second profit target will be 88 pips. (See Figure 7.9.)
FIGURE 7.9
Profit Targets for This Trade
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.10 Trade Hits Profit Targets Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
From the long example in Figure 7.10: Entry price = 1.0351 Stop loss = 1.0307 Profit target 1 = 1.0395 Profit target 2 = 1.0439 The risk for this trade is 44 pips, and the reward is 88 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Short Trade Setup We use the AUD/USD on M15 time frame for illustrating short trades. Here are the steps to execute the trade the break strategy for short: 1. Use at least two lows and two highs to identify the support and
resistance levels. (See Figure 7.11.) 2. Identify a candle that closes below the support. This is the breakout
candle. (See Figure 7.12.) 3. Enter short at the opening of the next candle. 4. Set the stop loss at the 60% mark of the range (distance between
the support and resistance) above the support. In this example, the distance between the support and resistance is 42 pips; the stop loss is set at 26 pips above the support. 5. We set two profit targets for this trade. The targets are set at a risk to
reward ratio of 1:1 and 1:2 respectively. Since the stop loss is 31 pips (distance between EP and SL), the first profit target is 31 pips, and the second profit target is 62 pips. (See Figure 7.13.)
FIGURE 7.11
Use Two Lows and Two Highs to Identify Support and Resistance Levels
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.12
Identify a Candle that Closes Below Support
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
FIGURE 7.13
Profit Targets Set for This Trade
Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
From the short example in Figure 7.14: Entry price = 1.0498 Stop loss = 1.0529 Profit target 1 = 1.0467 Proft target 2 = 1.0436
FIGURE 7.14 Trade Hits Profit Targets Source: Created with FX Primus Ltd, a PRIME Mantle Corporation PLC company. All rights reserved.
The risk for this trade is 31 pips, and the reward is 62 pips if both targets are hit. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.
Strategy Roundup As a trader, our job is not to predict but to react. In other words, we should not second-guess where the market is going and execute trades based on assumptions. Whenever the market approaches resistance or support levels, traders tend to jump in prematurely, which can yield disastrous consequences when the markets don’t go the way we want. Instead, a better option is to wait for the story to unfold. It certainly pays to wait for a confirmation before jumping onboard the breakout bandwagon. The confirmation comes in the form of the breakout candle that closes above the resistance or below the support. This is the market’s way of telling us that it has enough momentum to continue the run. By now, you must have realized that the two strategies—fade the break and trade the break—work hand in hand. Both strategies require us to pause and wait for a confirmation candle before deciding what to do. These candles are either false-break candles or breakout candles. With these two strategies, we can take a trade regardless of market direction.
