Box Breakout Strategy – Low Risk High Probability Trading Strategy
One of the fundamental principles at my trading methodology is to find low risk, high probability setups. The Box Breakout Strategy provides that. The standard method of trading a breakout does not provide low-risk and high probability setup because of market behavior to exhibit a lot of false breakouts.
We need to understand that breakout traders aren’t one category as a whole there are a lot of varying degrees of traders with experience and knowledge about trading breakouts. Novice traders will naturally be attracted to breakout trading because they’re sitting on their hands throughout a period of consolidation and as soon as the price starts to break through one direction they want to be jumping in and often times this can be proven to be false breakouts.
The true professional breakouts traders who now the market dynamics to the extent that they know the market is manipulated and smart money are influencing situation like these false breakouts, in order to unload their positions, they have design methods to make sure they don’t step in front of the smart money.
One way to avoid many of the false breakouts is to concentrate your attention on the higher time frame and going forward you’re going to learn about the 4H Box Breakout Strategy, a strategy designed to capture the intra-week trends. The main advantage of using the Box Breakout Strategy is that the profits you can make are proportionally much larger than the losses thus the average win is much greater than the average loss. However, the main disadvantage is that it has a lower winning percentage which for a lot of traders this can be a negative factor to even consider breakout trading.
The 4H Box Breakout Strategy
Since the market can be in one of two states: it’s either consolidating or it’s in trading mode, the 4h Box Breakout Strategy will help you catch the breakout of this consolidating zone. However, even when we’re in a trading mode the market will not move in a straight line, but from one consolidating zone to another one. Often this consolidating zones takes the shape of a box with a defined lower border, which acts as a support and upward border which acts as resistance.
The 4h Box Breakout Strategy rules:
- Draw a box connecting the highs and the lows of the first 4h candle of each week;
- The box forming time from 21:00 GMT to 01:00 GMT;
- Add a buffer of 20 pips on each side of the candle, in order to avoid false breakouts;
- Buy on the upper break of the 4h box (including the 20 pips buffer);
- Sell on the lower break of the 4h box (including the 20 pips buffer);
- Stop Loss other side of the box;
- Take profit 1x or 2x or 3x box size;
- Preferred currency pairs: mainly the JPY crosses, but it performs best on GBP/JPY;
The main advantage of the 4h Box Breakout strategy is the simplicity and it requires less time spent in front of the screen. If the market is in a strong trend you’ll be able to participate in this movement right from the beginning as you’ll be able to catch the entire intra-week trend.
Looking at some recent price action example (see figure above) we can see that since the last week of November 2015 going forward, each time we got a breakout of the 4h box the market never looked back and it generated as much as 1:4 risk to reward ratio.
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