Breakout can be exciting AND dangerous
I refer to my previous post ‘Long consolidations are setups that traders must not miss‘ and discussion on USDJPY and subsequently reader Benson’s question in the comment section.
Thank you very much for giving us the CHina A50 & GBP/NZD illustration example so that we can relate better to USD/JPY.
This is also known as Trading Break Out right? :)
What is trading breakout?
Playing breakout is a strategy that focuses on marketing timing. Traders want to jump into a position right before it breaks into an explosive run. This is also known as ‘catching the sweet spot’. No need to pre-position, don’t want to hold, don’t want to wait. Just show me profit right away. In my opinion it can be a successful strategy but I definitely favour fading breakouts than jumping them (fade = trading against a breakout).
Fact is trading breakout can be immensely profitable, exciting but also very dangerous. I can point out many positive demonstrations of a currency pair breakout out of a holding pattern and moving into a new trend but I can also point out negative demonstrations. For those that fail, I have names for them: false breakout, bull and bear trap, wash n rinse blah blah. I do NOT encourage breakouts. Please look at this post ‘Trend line break and its implications‘ that I wrote in 2009.
Was I shouting a breakout trade in USDJPY?
No. I applied principles of Tflow® and was looking at a retracement 1-2-3-4 consolidation setup. Don’t believe me?
Exhibit A – USDJPY was setting up a 1-2-3-4 long trade prior to the break. This setup is visible both on H4 and daily chart. I was trading into a 1-3 trend line break.
Exhibit B – In the hourly chart, there is an even smaller 1-2-3-4 continuation that clearly shows where support was. As long as I have this setup, I could jump a trade knowing perfectly well that I could use point 4 low as a reference to place my stop loss. Note: point 4 candle was only 22 pips tall. Add a small buffer and it is ready to go when we consider that 121 was the expected resistance. That’s nearly 100 pips away which means risk-reward ratio was alright.
Exhibit C – This was what Tflow® forex strategy was always about!
Focus on principles of retracement ‘buy low sell high’
Please don’t buy high hoping to sell higher. Also very important, go into trades when you can identify risk. If you think that you can risk a long trade in USDJPY with a 50 pips stop loss and you are happy, go ahead by all means. If you can’t identify your risk or it is too much for you, skip the trade. Behind this USDJPY trade is a very clear trading plan that I have for myself.
- Bias to long that was described as a ‘cup and handle’ in my post on 13 May.
- Waiting for the right setup to appear.
- Defining my risk and answering the question ‘am I going to be happy with this decision hours later?’
- And then going ahead to do it and bear personal responsibility for that.
To Benson, I can’t answer this part of your question because I don’t have an answer.
Usually for a break out to be substantial, what is the minimum consolidation weeks that we should be looking out for to justify that its a strong breakout?
I can only reply that I feel 8 weeks is too compelling.
@DLGFX Yes. In any case 8+ weeks of consolidation too compelling to pass.
— Soh tiong hum (@Sohtionghum) May 19, 2015
You just have to ask yourself which outcome hurts you more 1) deciding to miss a trade that turns out to be good or 2) losing some money on a trade that turns out to be bad because you did not want to miss a good one?
Your answer may be the same as mine or different. Just do what makes you happier.
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.