Advanced system #5 (Trend Lines Breakout System)

Hi Paul,

I'd use daily charts and simply trade the strategy.
That is my vision, however I'm always interested to learn about arguments in favor and against my approach from other traders and build productive discussion.

Regards,
Edward

Thank you Edward for your detailed e-mail and illustrations.

So, without a verifiable sideways channel on the Daily chart we simply trade the strategy and hope the percentages will be on our side correct?

Would the 4 hour chart help in identifying a sideways channel or do we have to use the Daily chart?

Thanks again,
Paul

Hi Paul,

Even after I said that a sideways channel might be the culprit of recent losses there was no way we could use this data early enough to prevent majority of losing trades. Why?

In order for a sideways channel to form on a daily chart we need time (often a week or two) for the market to create a series of waves that would validate its channeling activity. Since our strategy advices looking for trading opportunities every day, we are bound to make a lot of trades before we know that price actually was forming a sideways channel.
Also since sideways channels are found through pure chart observation, it ultimately means that some traders will spot sideways patterns earlier than others.

The main approach tor identifying sideways channels is by looking at waves (tops and bottoms) made by price.
Tops are called and marked as resistance, bottoms - as support levels.
Once a Resistance level is broken it becomes a Support level. And vice verse.

As long as support/resistance levels are passed successfully price advances either up or down - it trends.
Once a new wave fails to advance through the closest support or resistance for the first time, it attempts to find an exit at the opposite end, where it inevitably meets another support/resistance level. If the failure repeats again, than price becomes trapped in between support/resistance levels on both sides.
From that moment and till it breaks through those boundaries market is going to trade in a sideways channel.

From the illustration above, if on a re-test of Resistance price fails to advance through the level, we are going to have a sideways channel established (because earlier a re-test of Support already resulted in a bounce back).
A sideways pattern will be valid till price breaks out of the channel.

Here is our old screen shot with waves and S/R levels on it:

While some traders prefer using absolute tops and bottoms of price waves to mark support/resistance levels, others choose points where price has actually closed for the day. It is done at own discretion and is rather an art and vision of each individual trader than a rule.
Many would say that Support/Resistance level is an area, not a fixed price point. This is probably the most rational approach; it is also the one I use.

(The reason why I chose fixed numbers - 1.5400 and 1.5600 - instead of areas in my earlier post and screen shot was because I felt it would be easier to address further discussions to distinctive round numbers, plus it is well known that such round figures by themselves have a "stumbling" effect on the market.)

Here is the same screen shot with Support/resistance Areas instead of fixed levels on it.

Let's now zoom it in:

Well, I hope you find it useful.
As about timing, I'm afraid I won't have any suggestions for you. This particular strategy was tailored to a specific time.
Someone even asked me earlier about trying the strategy during Asian breakouts. The point is, I don't know how this strategy will perform during other market hours.
So, if you are passionate about testing, try it out. I would also be interested to hear about results.

Regards,
Edward

Hi Paul,

The reply to your comment is in process (it's left to make some illustrations).
I hope to finish it this evening or tomorrow morning.

Regards,
Edward

Hi Sara,

Thank you for your questions.

1. Yes, you may try taking only long trades above Pivot point; you may also try using , for example, 200 EMA to identify a main trend and take only long trades above 200 EMA and only short below it.
I would only encourage testing and experimenting.
However, I still see this strategy working fine without additional EMAs and Pivots to filter trading directions.

2. This trading method allows ignoring news and that's what I do. News can also be on our side helping to profit quickly. If not, I always have a stop in place.

3. I prefer either my stop to be hit or a profit target be reached. We have only three hour trading limit anyway (3 hours since the trend line breakout), so it is better to let a trade run unchanged.

4. The strategy doesn't validate swings before midnight, but there is always a room for testing. I have no advice on that since I haven't traded 23:00 EST swings. If you decide to, it would be good to keep notes on the success of such trading. If it is working, then why not trade it :)

Best regards,
Edward

Hi Edward,

Thanks for the clarification.

I think recognizing when there is a sideways channel and not trading during this time was the missing link. I didn’t know about this and looking at the 1 hour chart didn’t give me a heads up.

Would you please show me exactly how to spot a sideways channel (the beginning and end of it) and then show me how to draw the S and R levels based on it?

You also mentioned you prefer EST when trading this strategy. Do you stay up the whole night waiting to draw trend lines or how do you make it work? =)

I’m on PST right now… Any suggestions on the easiest way to make it work during this time zone? You might think its silly but the graveyard shift is tough. =)

Thank you and great weekend,
Paul Stevens

Hello Edward,
Thank you so much and your team for your hard work!

1.I am looking for an additional filter for this strategy, any suggestion?
If the session opens above the pivot point for example, is it safer to only trade long opportunities? same with a long term ema that would indicate the general trend?

2.Also I have noticed that during this time frame there are a lot of important news releases regarding the EUR and the GBP that move the market. How do you trade these news? Ignore them? Wait for a minimum of time before enterring/exiting?

3.Once in a trade, is there anything that makes you close the trade at break even or at a loss, instead of letting it hit your stop loss?

4.If there is a swing high or low at 23:00 EST, could it be taken in account for this strategy? It seems to happen before a long trend.

Thanks again!
Sara

Hi Paul,

1. A total of 50+ pips stop would make me uncomfortable. However, I'm using risk to reward approach rather than a fixed amount of pips to make trading decisions.
I use pivot levels to determine the initial profit target, this helps to know in advance what my reward can be and compare it against the risks, which I can roughly estimate based on trend lines set.

2. Yes, the entry is immediate upon piercing the trend line.

3. Right :)
4. Absolutely.
5. I'd start with scalping strategies #4 and #6 and try to improve them.
Our scalping systems section isn't very rich so far. There are few ideas and some interesting tools like those in a new topic about MT4 custom indicators that could be of a certain help.

6. That's right. The best daily chart strategy is the one that “knows” about sideways markets and avoids them, can find entry opportunities with lowest risk possible and is able to keep you in trade as long as a trend is in place.
See if you like daily advanced #3 and #1 and simple #14. Although they are already working well, they can be improved even further. For example, advanced #3 lacks ability to keep you long in trade, advanced #1 can be in trouble without a good trend, simple #14 can be late on entries and exits.

7. The corridor – sideways channel in our case, was determined by looking at support/ resistance levels. Once set we need to wait for a breakout before initiating new trades.

8. If we take trend lines required by our strategy, these are just hourly trend lines. I call superior trend lines those found upon studying 4 hour and daily charts.

Happy trading!
Regards,
Edward

Hi Edward,

Thank you for your quick reply.

A couple of follow up questions……

1. Okay, so you would set your stop loss 15 pips away from the top/bottom of the candle that breaks the trend line if there is a pivot nearby…… Gotcha……… How many pips away from the trend line would your stop loss need to be TOTAL for you to pass on the trade? 15+ how many? Sometimes it can get out there a ways.

2. In your answer to # 7 above you mention that the price needs to brake the trend line by 5-10 pips before you enter the trade? I just wanted to double-check this point. Is that right or is the entry immediate upon piercing the trend line?

3. You mention that you prefer EST for trading this strategy…… That means you are monitoring and working this strategy from 2 a.m. EST (2 a.m. to check for first possible trend line) through maybe until 6 a.m. (6 a.m. to check for final possible trend line)…….? Am I looking at that right? =)

4. Is it a good idea to observe European holidays as well since we are trading the London pre-open and open?

5. What scalping strategy do you like best? Most reliable? I would like to begin scalping.

6. It seems like the most attractive way to go would be to have as a primary strategy one that traded on a Daily chart. Reliable, profitable and not so time-intensive. Am I thinking right here? =)
What would you say the best Daily chart strategy is?

7. How do I determine the price corridor you talk about? Should I wait for it to be broken before trading again?

8. What are superior trend lines?

Thanks again and great week!
Paul Stevens

Hi Paul,

Thank you for your questions.

1. Right. The sideways price channel for EUR/USD is still holding; same tight corridor between support and resistance has been seen throughout the week on GBP/USD daily charts. Such market conditions are definitely not helpful. Losing weeks are possible.

2. Yes. If I see a Pivot level nearby (5, max 15 pips away) I may adjust my stop to that level. I have daily and monthly pivots on my charts. If I see a swing high/swing low nearby, I may adjust stop to that level.

3. Volume indicator might be helpful, but so far I wasn't able to make a good use of it for this strategy. I would appreciate any advice on that.

4. I know, that sounds a bit confusing. But here how it goes. As soon as I have a trend line in place I set an order according to the data I have here and now. Few hours later if the trend line is still holding, there could be a better point to enter the market, so I always re-adjust my pending orders if I happen to be around at that time, otherwise I leave it at the original value.

5. With this strategy I enter as soon as the trend line is broken. If to wait till the close of the breakout bar (or 5 bars you have mentioned about), we may be late on entries during aggressive breakouts - and that's exactly the type of breakouts we don't want to miss out.

6. I'm not concerned about doji candles and I like flat trend lines. The only thing that can stop me from trading is a distant stop loss. In such cases I try to find a closer one by looking at pivots, fibonacci, support/resistance levels, superior trend lines: everything that would suggest a logical place for the price to stop.
I don't look for hidden clues, I use only obvious well distinctive levels, lines or patterns, and if I don't see one, I don't trade.

7. Around 5, but no more than 10 pips.

8. I prefer EST time.

9. I have properly tested EUR/USD and GBP/USD only, tried x/JPY crosses too (they work fine). I believe that other pairs should produce good results as well, but my favorite are still EUR/USD and GBP/USD.

10. Fridays trading is fine. Only Sundays and Mondays are avoided. If the setup on Monday is welcoming I would take it, otherwise skip it.

11. All US holidays. I use Economic Calendar to learn about holidays in different countries.

12. I like this one most. There are probably even more reliable strategies traded, but I don't know about them yet.

13. I'd like to be introduced to a scalping method which ideally would allow
- trading 1 hour/ max 2 hours per day -> because I don't like "living" in Forex
- be independent from influences of either trending or ranging markets -> because I anticipate such strategies to be much simpler and easier to execute. I also don't like messy charts with tons of indicators on them.

I tried to make my answer complete, in case I've missed out something, please simply let me know.

Regards,
Edward

Hi Edward,

Thank you very much for all that you are doing for everyone through your site. You and your team are very appreciated.

I am trading the GBP/USD and the EUR/USD using this strategy and have a few questions for you:

1.This week I had 1 successful trade and got stopped out 3 times using this strategy, following the rules exactly and trading Tuesday through Friday…… have you found that some weeks just go that way? =)

2. Are there situations where you would set your stop loss farther out?

3. Would it be helpful to add a volume indicator and enter only when a certain volume level is reached?

4. How is it that you set 2 orders (Buy Stop and Sell Stop) if you don’t know what the price will be when it pierces the trendline?

5. Is it safer to wait for the 5 bars to complete before entering a trade, or is it best to enter as soon as a trendline is broken?

6. Are there any trendline breakouts that you don't trade… For example:

Because the stop loss is too wide?

Because there are too many doji in the previous candles?

Because the trend line is too flat?

7. How many pips does the price need to brake the trendline before you enter the trade?

8. Which time zone in the U.S. do you think (including Hawaii) would be most ideal to live in trading this strategy?

9. Are you aware of any other currency pairs that would work well with this strategy? Best hours to trade them?

10. You mention in an earlier thread that you never trade Sundays and don’t like to trade Mondays…… Are there any other days to avoid? Friday?

11. What holidays should be avoided?

12. Is their a more reliable break-out strategy you can share or would you say that this strategy is your first choice?

13. I would like to bring a very reliable scalping strategy into the fold…… Which one do you prefer? Reasons why? Best ranging currency pairs right now?

Thanks so much,
Paul Stevens

Hi Paul,

That's good.

1. Not much. There are ups and downs, like with any system.
2. I would look back at a larger trend, but just to ensure we're not trading at some significant S/R level or stuck is a range. Other than that I believe I've got enough information to trade with what I see here and now on 1 hour chart.
3. I personally don't like trading Mondays and never trade Sundays. I believe that breakouts during those days are less reliable.
4. I don't look at the slope of the trend line, but if it looks incredibly steep, it suggests a less reliable signal on a breakout.

You are always welcome!

Regards,
Edward

Hey Ed, I changed the way that swings are detected to be discriminate on which is higher/lower, and it seems to be working a lot better. I have a couple questions, though.
1. Have you seen a decrease in the reliability of this trading system recently?
2. Would you recommend taking into consideration the larger trend?
3. What about Sunday and Monday? Are the swing breakouts still reliable on those days?
4. Do look at the slope of the trendline at all? I mean, if it's really steep and plummets through the price, would you still consider that a breakout?

Thank you very much for your time.
Paul

Hi there,

It doesn't matter how much higher the swing high is compare to its neighboring candles. It should simply be valid.

The steps you take are right, except for the last one. Stop loss is placed 5 pips below the low of the bar that triggered our entry (in this case Buy) order.
Also you have added 8 EST rule. That's optional. I wait for a breakout till the close of New York trading session (5 pm EST).

Also does your system take in the account next:

Plus you take the firsthigh from today's 5 candle range (correct), but the second one from yesterday, which is wrong; we scroll back as far as we need, few days, weeks etc before we find a valid swing for a trend line.

Hope this helps,

Regards,
Edward

Hey Edward. I programmed this system into an AmiBroker formula, and the results aren't promising. It only detects the swing high breakouts, but it seems that it gets stopped out more than it finishes the breakout. I was wondering if I'm doing something wrong. Does it matter whether the swing high is a certain amount higher then the high on either side?

Here are the steps that it takes:
(1) Find two highs that are any amount higher than the highs of the bar to either side, the last one from yesterday, and the first one from this morning before 5:00 est.
(2) Buy the first instance that breaks through the line connecting these two points (as long as it's before 8:00 est)
(3) Sell at the pivot point R1 or at 8:00.
(4) Stop loss at 5 pips below the low of the bar containing the morning swing high.