Mechanical forex trading strategies

CounterStrike Trading Method. 100% mechanical.

This is a simple trading method and it can work on any pair. However, it must be used on the Daily timeframe only. The best part of this system is that it just need a few minutes from the trader and it is 100% mechanical. You just have to do what the system is telling you to do, there is no time to think. And we are only using a few indicators just to help us with some calculation but not to derive any trading signal from them.

As the name implies, this trading system is a counter trading strategy, that is, we are buying when people would normally be selling and we are selling when people would normally be buying. We will also be using a Risk/Reward ratio of 1:1.. The system is just the basis of what can be a more complex system after you tweak it and add indicators etc to fine tune the strategy. I am going to write on the rules one by one and detailing them as we go on. and you will see at the end that it is indeed a very simple mechanical method.

1. Calculate the Average height (pip height) of the last 10 Daily candles.

We first need to calculate the average height of the last 10 daily candles. To calculate the height of 1 candle, we take the High of the Candle and we minus the Low of the same candle and we get the height in pips. Each candle will have a different height or pip height. Here is a screenshot to get a clear understanding.

However, what we need to calculate is not the height of 1 candle but the AVERAGE height of the last 10 candles. We can do so by calculating the height of each candle separately, then adding them together before dividing them by 10 to get the average height we are looking for. Of course, this can be tedious and time consuming. However, there is a trick to achieve this. We just need to add 2 simple moving average to the chart. The first one with a period of 10 on the HIGH and the second one with a period of 10 on the LOW. Now to get the pip range we are looking for, we take the High moving average value and we minus the Low moving average value and we get the average pip height of the last 10 candles. If you want to look the average pip height of the last 20 or 50 candles, you just change the period of both simple moving averages to these values. Here is a screenshot of what I am talking about. Please take note that we need to use values from the SMA on the current candle which is still open.

This is all regarding step one and as you can see, it is very simple and easy to get this average pip height of the last 10 candles on your chart. You must also note that the moving average were used just to ease the calculation process and not for generating any trade signal. I hope everything is clear in your head so far. if not, then please read this part again and try to do some practice on your charts. After you are done, then you are ready to move to step 2.

2. Calculating the TriggerPip Value from the Average Pip Height.

After we have calculated the Average Pip Height from step 1, we should move to the next step which teaches us how to calculate the TriggerPip Value. First of all, you might be asking yourself what a the TriggerPip value is. there is nothing to worry about and it is just a fancy name that I have come up with. The TriggerPip is very important as the Entry of the trade will be 100% based on it. As far as the calculation of the trigger pip is conncerned, it can be done by a school kid. You just calculate the 80% of the Average Pip Height you got earlier and you are done. For example, if the Average Pip Height is 100pips, the TriggerPip Value will be 80 pips. As simple as this.

Let me elaborate a little on why we choose this 80% for the TriggerPip Value. Even though the Average Pip Height is 100 pips for example, you will see that many candle will not even reach this height but however, most of the time, they should reach around 60%-90% of the Average Pip Height. So I chose this 80% as it seems to be reasonable amount the many candle will be respecting. If everything is clear so far, you can move to next step. Otherwise, make sure you read this step again. Also, the system is open and you can use another percent value if you like.

This part concern the trade entries and it is very important that you understood all of the above before you can continue reading this part. Now, you should monitor the daily candle. and watch its height closely. If the height is less than the TriggerPip value we got earlier, then we do nothing. But. if the price is equal or greater than the TriggerPip Value, then we need to open the a trade.. but in which direction? Let's see.

4. When to go Long or Short.

When the height of the candle rise up and becomes equal or greater to the TriggerPip value, then we need to see on which side of the candle the TriggerPip value was met. If it happened at the bottom of the candle, that is price is at the LOW of the candle, then we should open a BUY position but if it happened when the price is at the HIGH of the candle, then we need to open a SELL position. As you can see, this is a counter trend method as when price is rising, we are selling and buying when price is falling. We are will be capitalizing on the retracing moves to make some profit. Look at this illustration below for a clear idea about the positions details.

I hope that that illustration above can help you in understanding the logics behind the buy and the sell. A point that should be noted carefully is that. we do not care about any other candles . we only need to work on the current candle and we should just focus on it alone. Do not get distracted by the other candles and follow this system mechanically. Do not under-estimate this method due to its simplicity. it has more inside. The last part of this system is the setting of the stoploss and takeprofit levels and I should be writing on it in the next part. Good luck so far.

5. Where to place the StopLoss.

After we have determine a trade signal, it is time to put the Stoploss as it will help in decreasing our risk and improve the consistency of the system.

For a BUY, you place the Stoploss at 1-5 pips below the FIRST LOW WHICH IS LOWER THAN THE CURRENT LOW. If the candle before the current candle you are trading on has a higher LOW, then look at that candle just before this one and keep going like this till you find a LOW which is LOWER than you current LOW.

As for the SELL position, you will place the stoploss a few pips above the HIGH which is HIGHER than the HIGH of the current candle. We are not looking for the HIGHEST HIGH or LOWEST LOW to place the stops but we are only looking at the first candle which HIGH or LOW is HIGHER/LOWER than the current UNCLOSED candle on which you are currently trading.

6. Set the TakeProfit.

Now the last thing that we need to set is the TakeProfit an it is very important as well. The TakeProfit also is not complicated at all to calculate. You just set the TakeProfit at 50% (HALF) of the current candle and it is the same for both the buy and the sell position. For example, it a candle is 100 pips long, and it we have signal to open either buy or sell position on this candle, then we will set the TakeProfit of each of them at 50% of that candle at the time you are opening these positions. So in our example, the TP will be 50 pips above the buy or 50 pips below the sell.

I have come to the end of this explanation and I hope I have covered all the main rules for the strategy. Please take note that I have come up with this trading method all by myself and it has been shared here on fxfisherman exclusively. You should also take note that I do not myself use this method as I just came up with these trading ideas recently and I am still experimenting on it. I am sure many of you will doubt this method due to its simplicity and honestly, you should not be thinking in this way. The simplest are always the best. Take some time and study this system. You are free to experiment and tweak it to your own liking as well. Suggestions and improvement ideas are welcomed. Would like to hear back from you, especially if you are practicing it on a demo. The system is not easy to backtest at all and most of the testing should be done in the real market or through a trading simulator. Good luck and all the best.

I have finished writing and detailing this trading method. Please take some time to read and study it. Hope the fxfishermen will benefit from this method.

It wont work. Get an EA and test it. I have tested it AND SIMILIAR SYSTEMS. SORRYOILFXPRO.

Sorry but you are really pathetic. Make the EA yourself and test it out. Show your test results if you are truthful! You have not even tested the system and you are already making statute comments. Are you out of your head? I do not think testing similar systems equals to testing THIS METHOD as it is.

Bossxero made a good point. Oil, you claimed the system didn't work without giving any proof at all. You even claimed you tested it as an EA. But then you contracted yourself with "not spend more time writing EAS I know won't be of any use to me afterwards." My best guess is that you haven't tested this actual setup at all.

Two similar systems don't mean they will perform the same way. You probably know than more than I do that even a minor change in parameters of the same system alone will lead to a different outcome, let alone the difference of a whole bunch of logics.

Correct, but I know a profitable /unprofitable system when I see one. If he uses a CCI /stochastics on a hourly t/f before entry, it will work for the manual trader. oilfxpro.

Ohohoho. Seems you got a crystal ball out there. Or as you say. you might be the forex grandpa. or the one behind the market moves itself.

If you took time to read the post well rather than jumping to your 'miraculous' conclusions, then you should have read that this is a trading IDEA and it is open to improvement. You are deceiving neither me or anyone here . but yourself. As many already told you, you better grow up.

thanks for the system bossxero. it have great potential.

Thanks a lot for sharing Bossxero - I intend to write an EA for it. Will share it in several days.

XRange, have you finished the EA? just can't wait to see how it works.

5 months later. tum dee dum! Does anyone have results to post? Im just getting started so will probably have something (results, not the EA) by end of week. And just asking, when everyone talks of the EA, if I happen to have the automated Excel version following it, how do I enter those formulae into the EA, coz the EA is all . geeqspeeq right now for me. I intend to sit down on mql4 later when I DO have time. Easier in Excel, unless someone helps me fit which figures into the EA maker?

Forex BEST 5 Simple High Profits Mechanical Trading Systems.

FREE DOWNLOAD Top 5 Simple High Profits Mechanical Forex Trading Systems – Looking for the best forex trading system? We have extremely accurate forex trading system which is highly profitable and very simple to Follow!

Forex Trend Session Synergy Trading System with Momentum and Multi Time Frame Moving Average.

How to use Forex Trend Session Synergy Trading System with Momentum and Multi Time Frame Moving Average to maximize your profits. Forex Trend Session Synergy Trading System is trend following and momentum strategies in forex markets.

Trend following and momentum strategies is a trading strategy used by many successful trading systems. Trend following trading is not very complicated in terms of rules. It can be quite tough in reality but the trading rules themselves are often not that complex.

The Multi-Timeframe Moving Average (T3 Moving Average indicator) is part of the Forex Trend Session Synergy Trading System. It will calculate and display a moving average using the bar interval, moving average type, length, and price source that you have selected. This allows you to plot moving averages based on a bar interval that is higher than your current chart interval . If you do not specify a bar interval then the moving average will be calculated in the chart interval. Multiple moving averages can be loaded into the same chart.

Correctly Identify Forex Trend with Renko Bar Chart and Momentum Trading System.

High Accuracy Renko Bar Chart Trading System . I will tell how to Correctly Identify Forex Trend with Renko Bar Chart Trading System – You might be familiar with renko charts. These are simply boxes that are plotted when price closes an “x” number of pips above or below the previous close.

This charting methodology differs from the more traditional candlestick or bar charts. So while you might find renko charts to be different in their appearance, they have a unique capability of showing you the trends as well as help you to easily identify support and resistance levels.

“Momentum” indicator in general refers to prices continuing to trend. The momentum indicator show trend by remaining positive while an uptrend is sustained, or negative while a downtrend is sustained.

A crossing up through zero may be used as a signal to buy, or a crossing down through zero as a signal to sell. How high (or how low when negative) the indicators get shows how strong the trend is.

The conventional interpretation is to use momentum as a trend-following indicator . This means that when the indicator peaks and begins to descend, it can be considered a sell signal. The opposite conditions can be interpreted when the indicator bottoms out and begins to rise.

Forex High-Probability Techniques for Trading with HolyTrend Stochastic Trading System.

High-Probability Forex HolyTrend Stochastic Trading System – Most recommended and high accuracy trading system to Buy the Higher Low and Sell the Lower High in forex market.

Trading in the direction of the trend and buying low while selling high are mutually exclusive. Because we recommend you locate the direction of the trend and find a good entry, this is a new concept for you to consider. Buy the higher low and sell the lower high . This trading system will provide you with methods to do just that to prevent you from catching a falling knife.

One of the principles of every trader who enters an order, whether long or short is that they believe they’ve entered at a good price in relation to where they expect the market to go.

One trader will be right and the other will be wrong if they entered at the same price with similar stops and limits. While there is no guarantee which trader will be profitable and which won’t, there are some things we can do to put the odds in our favor.

Most Accurate Moving Average TrendLine Trading System.

Forex Trading System with a smart and reliable indicator of the trend lines True Trendline. MA TrendLine is highly accurate trend following forex strategy. The system gives you clear signals which will definitely help you to make best trades. Forex MA TrendLine hasn’t used any indicators that are hard to understand and that is confusing either . The chart looks very clean and professional.

There are six technical indicators that contribute to generating signals. Forex MA TrendLine can be used to trade in any time frame with any currency pairs but make sure that you are trading in a trending market not flat.

Despite the fact that this system can be used on any time frame, time frame above 15 minutes is preferable since market is less chaotic in larger time frames. On the main window you’ve got three indicators.

Most of them are custom made indicator. There is an indicator which looks like bbands stops named as volty channel stop. A custom made moving average which is named as Vh. And even the charting types used in Forex MA TrendLine are custom made one.

Forex Fiji Trend Trading System with Solar Wind Joy and High Low Activator Indicator.

Forex Maximum Profits System – Forex Fiji Trend Trading System with Solar Wind Joy and High Low Activator Indicator. This is high profits and high accuracy forex trading system.

The Forex market consistently attracts traders of all skill levels and strategies. This is probably one of the most advanced basic strategies out there. It is also highly adaptable, can be traded on any timeframe, any currency pair, long-term, medium-term, even scalping (although scalping is it’s least suitable use).

To apply this Forex Fiji Trend Trading System with Solar Wind Joy and High Low Activator Indicator we must first be aware of the existence of a trend. Without identifying a trend we would be gambling , and that’s not the purpose of trading forex.

Forex Strategies.

Forex trading cannot be consistently profitable without adhering to some Forex strategy. It takes time and effort to build your own trading strategy or to adapt an existing one to your trading needs and style.

What Is a Trading Strategy?

Most frequently, a trading strategy is a set of entry and exit rules , which a trader can use to open and close positions in the foreign exchange market. This rules can be very simple or very complex. Simple strategies usually require only few confirmations, while advanced strategies may require multiple confirmations and signals from different sources.

Additionally, a trading strategy may contain some money management rules or guidelines. Some strategies (e. g. Martingale) can be centered strictly around position sizing techniques.

Apart from the entry/exit rules and optional money management guidelines, strategies are often characterized by the list of trading tools required to employ the given strategy. These tools are usually charts, technical or fundamental indicators, some market data or anything else that can be used in trading. When choosing a strategy, you need to understand, which of the required tools you have in possession.

It is important to choose a strategy or system that is easy to follow with your daily trading schedule and that can be applied successfully with your account balance size.

Mechanical vs. Discretionary.

Forex strategies that are traded based on strict mathematical rules with no ambiguous conditions and no important trading decisions to be made by the trader are called mechanical . A good example of a mechanical system is a moving average cross strategy, where MA periods are given and positions are entered and exited exactly at the point of cross. When working with mechanical trading strategy, it is easy to backtest one and determine its profitability. You can also automate such system via MetaTrader expert advisors or any other trading software. The usual drawback of such strategies is their lack of flexibility before the fundamental changes in the market behavior. Mechanical strategies are a good choice for traders knowledgeable in trading automation and backtesting.

Strategies that retain some uncertainty and cannot be easily formalized into mathematical rules are called discretionary . Such strategies can be backtested only manually. They are also prone to emotional errors and various psychological biases. On the bright side, discretionary trading is very flexible and allows experienced traders to avoid losses in difficult market situation, while offering an opportunity to extend profit when traders deem it feasible. Newbie currency traders should probably stay away from discretionary trading, or at least try to minimize the extent of their discretion in trading.

Strategies.

In this Forex strategy repository, you will find various strategies that are divided into three major categories:

Indicator Forex strategies are such trading strategies that are based on the standard Forex chart indicators and can be used by anyone who has an access to some charting software (e. g. MetaTrader platform). These FX strategies are recommended to traders that prefer technical analysis indicators over everything else:

Price Action.

Price action Forex strategies are the currency trading strategies that do not use any chart or fundamental indicators but instead are based purely on the price action. These strategies will fit both short-term and long-term traders, who do not like the delay of the standard indicators and prefer to listen as the market is speaking. Various candlestick patterns, waves, tick-based strategies, grid and pending position systems — they all fall into this category:

Fundamental.

Fundamental Forex strategies are strategies based on purely fundamental factors that stand behind the bought and sold currencies. Various fundamental indicators, such as interest rates and macroeconomic statistics, affect the behavior of the Forex market. These strategies are quite popular and will benefit long-term traders that prefer fundamental data analysis over technical factors:

Testing Your Forex Strategy.

It is very important to test your trading strategy before going live with it. There are two ways to test your potential trading strategy: backtesting and forward testing.

Backtesting.

Backtesting is a kind of a strategy test performed on the past data. It can be either automated or manual. For automated backtesting, a special software should be coded. Automated testing is more precise but requires a fully mechanical trading system to test. Manual testing is slow and can be rather inaccurate, but requires no extra programming and can be done without any special preparation process. Any backtesting results should be taken with a grain of salt as the tested strategy might have been created to fit particular backetsting historical data.

Forward Testing.

Forward testing is performed either on a demo account or on a very small (micro) live account. During such tests, you trade normally with your strategy as if you were trading your live account. As with backtesting, forward testing can also be automated. In this case, you would need to create a trading robot or expert advisor to execute your system. Of course, with discretionary strategy, you are limited solely to manual testing. Forward testing results are considered to be more useful and representative than those of the backtests.

Interpreting the Results.

However you decide to test your strategy, you need to understand the results you get. Intuitively, you would want to judge the results according to strategy's profitability, but you should not forget about other important parameters of successful trading strategies. They are: low drawdown sizes, short drawdown periods, high probability of winning, high average reward-to-risk ratios and big number of trades. Ideally, your system should earn equally well on bullish and bearish trades, the resulting balance curve should be consistent and uniform, without significant drops or long flat periods.

If you are using MetaTrader for backtesting or forward testing, you can use our report analysis tool to better understand the strong and weak sides of your strategy.

Further Reading.

If you want need information on Forex strategies or need some additional examples of working strategies, you are welcome to browse our e-books section on strategies to learn from completely free downloadable e-books. You may also choose to read some articles from our strategy building section to improve your knowledge of the subject.

If you want to share your Forex trading strategy with other traders, or want to ask some questions regarding the strategies presented here, please, join a discussion of the Forex strategies at the forum.

Simple Forex Breakout Trading Strategies.

Many forex traders watch prices trade in narrow ranges for long periods of time, so they’re eager to trade breakouts when they occur. Since breakouts represent a sharp move in price, either up or down, traders focus on getting aboard the move as soon as possible.

Over-eager traders are tempted to chase the price, which can be disastrous. The trick is to get in early enough, yet not too late. Success means identifying the signals of a forex breakout, then confirming them before entering the trade.

In this article we’ll look at a few simple, profitable forex breakout trading strategies. They can help traders avoid letting the price get away, while avoiding chasing losers. These channel-breakout trading strategies, called “pop-and-stop” and “drop-and-stop,” are especially effective around session-opening times.

These simple strategies are focused on the major currencies — EUR/USD, USD/JPY, EUR/JPY, GBP/USD trading on hourly or daily time frames. They are short-term strategies based on only a few indicators. They rely on simple, unambiguous trading rules, and of course they’re expected to be profitable.

“Pop and stop” for bullish breakouts.

The pop-and-stop forex breakout trading strategy is based on price action along with other trading indicators, such as the rejection bar candle chart pattern, Harami candle pattern, round-number forex price levels, Bollinger Bands, polarity indicators, or other indicators of nearby support and resistant levels.

When using hourly or daily candlestick pricing, a 50-period simple moving average (50 SMA) is a good trend filter.

The candlestick chart above shows a break out near the beginning of a forex trading session (left circle), as well as a bullish rejection bar that formed an unrelated pattern without a stop-and-pop trading opportunity (right circle).

It’s usually difficult to know what causes the upside break until later – Often, it is due to a news announcement or simply the weight of heavy players taking long positions in the base currency.

In any event, the price “pops” out of its previous range, then briefly “stops” before resuming its upward march. This trade opportunity is shown by the left-side white circle on the chart above.

The left-circled chart pattern above shows 2 bullish rejection bars being formed and rejecting above a round price number, which is the gray line. During the third period, the trade is entered at 2 pips over the high of the second rejection bar.

Typically, a forex breakout in one direction showing a long candle is followed by a retracement back to the level where the price first exited from the range. This happens when the rapid price move has occurred because of a liquidity gap across a range with few orders.

Rejection bars and other confirmation of the breakout.

The gaps are usually filled sooner rather than later. If the gap isn’t filled, then the move is truly a breakout.

Before executing a trade order, the trader should make sure the forex breakout is confirmed. After the initial “pop,” it’s important to wait for confirmation, since the price could continue to rise, or fall back into its recent range again.

Rejection bars are the most common signal confirmation for the pop-and-stop forex trading strategy and other strategies based on candlestick chart patterns.

The rejection bar is a forex candlestick which shows that market participants have rejected higher or lower prices. Each rejection bar is a single formation, and it is also known as a “hammer” or “inverted hammer.”

This bar is typically formed when the price opens and moves first in one direction, then reverses to close the candle period at or past the opening price.

When rejection bars find resistance at round-number forex price levels and other support-resistance-inflection points, it is a good sign that the price will soon move upward again.

Ideal rejection bars show an open and close very close together – The closer together, the better. Ideally, both the opening and closing of the rejection bar are located near the end of the bar; the closer to the end of the bar, the stronger the signal.

The tail on each rejection bar should be at least as long as the body. The longer the tail, the better the signal, since this shows stronger rejection from the low.

The pop-and-stop confirmation signals can be based on round-number forex price levels, which are a common psychological support or resistance level. Also, for the bullish pop-and-stop confirmations, forex traders can use other support levels such as Bollinger Bands, polarity indicators, or nearby trading range levels.

A mechanical forex trading system can be programmed to trade breakouts based on the candlestick charting parameters and other technical indicators.

The Harami is a pattern which can help confirm both bullish and bearish breakouts, including the exit point from successful “long” trades. It consists of one long candle followed by a shorter candle whose body is within the range of the larger body.

Regarding color – The bearish Harami in the below chart shows the typical downward-moving (black) candlesticks with significant “wicks” which signal an impending retracement.

Mechanical trading systems can calculate the candlestick values and apply the appropriate trading rules to use Harami candles to signal either the end of a bullish runup, or a rally after a downtrend.

Forex trading strategies for bullish pop-and-stop breakouts.

As shown within the second white circles in the two price charts, the pop-and-stop strategy can be traded together with the counter-move reversal strategy, if the price happens to reverse and fill the gap.

The pop-and-stop strategy takes advantage of the continuing move after the gap-up. Here are the parameters that signal a bullish trade opportunity:

• The price was trading in a narrow range after a big move during the previous time period.

• The price “popped” out of its range, then “stopped” moving.

• The price should next form the confirmation pattern – A “rejection bar” from the nearest round-number price level.

• The price forms a second rejection bar.

• Other indicators confirm the expected movement, including Bollinger Bands, polarity oscillators, or proximity to round-number forex price levels, or support and resistant levels.

During a bullish breakout, the simplest way to trade the price move is to place a limit order 2 pips ahead of the strongest rejection bar.

For an aggressive strategy, the stop loss can be placed just below the tail of the strongest rejection bar. A more conservative approach is to place the stop-loss order just slightly below the high of the recent range.

The chart above shows the entry point for trading a bullish breakout using the pop-and-stop strategy (left circle) as well as the bearish signal for exiting the trade (right circle). The bearish candles form a Harami candlestick pattern.

“Drop-and-stop” bearish downside breakouts.

Forex traders can also take advantage of drop-and-stop bearish downside breakouts, which are the converse of pop-and-stop bullish upside breakouts. Likewise, drop-and-stop downside breakouts are especially tradable when major forex sessions open.

The above chart shows the forex price faltering at the polarity indicator, then breaking downward in a series of strong bearish candles below the preceding range. The first drop-and-stop trading opportunity is shown in the left circle.

Although the following candlestick wasn’t fully confirmed by bearish rejection bars, still, traders can enter after the close of the bearish candle.

The mechanical trading system should set the entry point at one or two pips below the monthly pivot, as in the above chart, or another reliable indicator such as Bollinger Bands, polarity indicators, or nearby trading range levels.

The second circle above shows another drop-and-stop trading opportunity, with a bearish near-rejection candlestick confirming the signal. The trading system should enter the trade at the low point of the strongest rejection bar or most bearish candle.

Be wary of false breakouts.

After an apparent breakout, there is a risk that the gap may be “filled.” It’s important to use the subsequent rejection bars as confirming indicators before entering the trade order. It’s also best to trade a pop-and-stop bullish breakout in the direction of market sentiment, especially after news causes a price breakout from a narrow trading range.

The pop-and-stop breakout strategy should only be deployed in the major, highly-liquid forex currency pairs which have enough support for the rally to continue. At the same time, the trader should be aware of upcoming news or corporate announcements that might quickly reverse market sentiment and fill in the recent price gap.

Timing and volume are critical for breakout success.

High volume is the single most important confirmation for a breakout and subsequent showing of trend.

Although forex markets are open 24 hours worldwide, volume varies during different time ranges. The largest markets are London/Europe, New York, and Tokyo/Asia.

Predictably, the highest currency trading volumes happen when the New York and London sessions overlap for several hours. This is true even for currencies like Japanese Yen or Australian Dollar whose underlying marketplaces are not open during these time zones.

And, the lowest total forex trading volume is often seen after the New York session closes, in the couple of hours before the Tokyo market opens.

This is important because intraday and daily forex breakout strategies like “pop-and-stop” and “drop-and-stop” are more likely to be successful when there is a high trading volume and pricing range, and large number of market participants.

The early London breakouts.

Since London is a leading global forex trading and financial center, it often sets up a short-term trend which affects other markets opening at London’s tail end. The early part of the London session is especially promising for profitable “pop/drop-and-stop” breakout trades.

With a good Expert Advisor (EA), the mechanical trading system can be prepared for breakouts which often happen at the open of forex sessions in London and New York. In fact, these breakout strategies work especially well for the London open.

Trading rules.

The pop-and-stop is a short-term, bullish breakout-scalping strategy. It’s best to set tight stops, say 2 to 5 pips, and take profits fairly quickly. When trading the major currency pairs, the safe take-profit limit seems to be a ratio of about 1.5:1 or perhaps 2:1.

Beginning around 8:00 GMT when the London session opens, the mechanical trading system watches the highs and lows of the candlesticks. The system goes “long” if the forex pair price penetrates the high of either or both of the rejection bars, and the price is above the 50 SMA.

The system goes “short” if the price goes below the lowest point of one or both of the rejection bars, assuming the price is below the 50 SMA.

Position size should be limited to no more than 2 or 3% of the trading account equity.

To reduce the risk of trading over-correlated currency pairs, the system places a maximum of only one open trade per day, whether long or short.

Risk management and stop-loss orders.

Any forex trading strategy focused on breakouts requires appropriate risk management. When using “pop-and-stop” and “drop-and-stop” breakout strategies with confirming indicators, traders should use stop-loss levels only a few pips away from the entry points.

For either long or short positions, the mechanical trading system automatically places the stop-loss exit order at a level from 2 to 5 pips away from the entry point.

Trailing stops.

Once the price moves favorably, the trading system moves the trailing stop along to the next support or resistance level as shown by the preceding candles, and keeps it updated.

Backtesting.

Anecdotal reports of backtesting by some forex traders using these two breakout strategies have indicated potential returns of up to 60% in about 8 months, which is a compound annual growth rate of over 100% while max drawdown was less than 13%.

Conclusion.

Forex breakout trading with mechanical systems based on “pop-and-stop” and “drop-and-stop” strategies can earn respectable returns as long as the trader relies on appropriate confirmation that the breakout will continue, including rejection bar and Harami candlestick calculations, or other indicators such as Bollinger Bands and support-resistance oscillators.

Before entering the market, a forex trader should check for high trading volume and a broad range of market participants. For traders who correctly time entries, breakouts can be very profitable moves.

Do you use any breakout strategies?

Hello! Tell me please what is your broker? Or where better to open an account when my nationality is American and I live there?

We don’t have many options living in the US. Thankfully, all of our options are reputable. The options are FXCM, GAIN, Oanda and Interactive Brokers.

Thank you a lot Shaun!

Hello shaun, my name is yunus from Indonesia.

I want to ask about elliot wave pattern to identifying the breakout.

Is there any application for forecasting elliot wave pattern ? Or maybe if you may mention me some book/journal reference for elliot wave.

I’ve been studying about fibonacci retrace, and in my opinion there’s a need to understanding an elliot wave pattern moreover if combined by fibonacci retrace to identified the breakout.

Thank for your attention, and sorry for my lack of english structure..hehe.

I think it’s amazing that we have traders from around the world on the site. Welcome!

I personally haven’t bothered studying Elliot waves because Elliot Wave technicians famously never agree on anything. If a topic cannot be mechanically defined, then I tend to ignore it. I’m not lacking for research ideas.

A common tactic that I suggest for retracements is to study how the MetaTrader indicator called “ZigZag” draws its highs and lows. You have to know that there is a repainting period, so it’s not an indicator for cherry picking highs and lows. But so long as you keep your analysis to studying retracements, the ZigZag is a brilliant way to analyze whether Fibonacci offers any benefit to traders.

“It’s best to set tight stops, say 2 to 5 pips, and take profits fairly quickly.” On hourly charts? You have got to be kidding. That stop is way too tight. Anecdotal my arse. That’s just not going to work. And the long list of supporting indicators leaves so much room for varied interpretation that there’s really nothing mechanical about the advise here. The idea of waiting for the pause after a strong breakout is the best thing to take from this article. These articles should also really spend more effort discussing exit strategies as that is arguably more important than all the focus on the entry. Anyway, thanks for sharing.

I agree that’s too close for the active hours, although there are times of day when extremely tight stops make sense. I’ll be sharing my research on time of day stops relatively soon.

Paul Nelson says.

It is an interesting article on that breakout type of things.

My question to you. Do you use this concept to be part of your trading strategies?

Or do you use Algo approach instead of what the article says. such as Sb scores or Weighted digital score type of system of yours. Or do you combine the two of these strategies??

I do not use this approach in my trading. Everything that I do is algorithmic. This article is intended for a different perspective for people that want to trade with discretion.

hiii plzzzz tell me hiwayfx good broker or not ??

I’ve never heard of them, so I can’t comment because I don’t know anything about them.

Do a Search for reviews on them especially.

Hello, I understand there is a mechanical trading system on this system (light or adviser), where you can download it or watch?

This strategy doesn’t lend itself to programming as an EA. When you see a breakout, it has to be relative to something. But relative to what? The last 20 bars? The last 50 bars?

And then there’s the price congestion. For how long does it have to stay in the same area? The general idea is clear, but coding it into mechanical rules would require a great deal of analysis.

The eye always cheat, do only see when what it want to see, not all the times where the indicator is giving a false signal, which is the majority of the times – the above examples are maybe true on these charts, but if looking at other similar charts and events, the outcome is another.

Of course there’s variation. I don’t think anyone reading this article comes away expecting 100% winners.

James Gregory says.

wonderful articles here BTW thanks for all your help shaun really enjoyed speaking with you on the phone.