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Trading Breakouts - Doing the Right Things

Discussion in 'Forex Discussions' started by painofhell, Aug 5, 2016.

  1. painofhell

    painofhell Content Contributor

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    Most traders are reluctant to buy breakouts, for fear of being the last one to the party before prices reverse with a vengeance. So, how can they learn to trade breakouts confidently and successfully? The "do the right thing" setup is designed to deal with just such a predicament. It tells the trader to buy or sell when most ingrained lessons are against doing so. Furthermore, it puts the trader on the right side of the trend, at the times when many other traders are trying to fade the price action. Read on as we cover this strategy and show you some examples of how it can be used.

    Do the Right Thing
    In the "do the right thing" strategy, the capitulation of top and bottom pickers in the face of a massive buildup of momentum, forces a covering of positions, allowing you to exit profitably within a very short period of time after putting on a trade.

    "Do the right thing" employs a rarely used indicator in FX called the commodity channel index (CCI), which was invented by Donald Lambert in 1980 and was originally designed to solve engineering problems regarding signals. The primary focus of CCI is to measure the deviation of the price of the currency pair from its statistical average. As such, CCI is an extremely good and sensitive measure of momentum and helps us to optimize only the highest probability entries for our setup.

    Without resorting to the mathematics of the indicator, please note that CCI is an unbound oscillator, with a reading of +100 typically considered to be overbought and any reading of -100 considered oversold. For our purposes, however, we will use these levels as our trigger points, as we put a twist on the traditional interpretation of CCI. We actually look to buy if the currency pair makes a new high above 100 and sell if the currency pair makes a new low below -100. In "do the right thing" we are looking for new peaks or spikes in momentum that are likely to carry the currency pair higher or lower. The thesis behind this setup is that, much like a body in motion will remain so until it's slowed by counter forces, new highs or lows in CCI will propel the currency farther in the direction of the move, before new prices finally put a halt to the advance or the decline.

    Rules for the Long Trade
    1. On the daily or the hourly charts, place the CCI indicator with standard input of 20.
    2. Note the very last time the CCI registered a reading of greater than +100 before dropping back below the +100 zone.
    3. Take a measure of the peak CCI reading and record it.
    4. If CCI once again trades above the +100 and if its value exceeds the prior peak reading, go long at market at the close of the candle.
    5. Measure the low of the candle and use it as your stop.
    6. If the position moves in your favor by the amount of your original stop, sell half and move the stop to breakeven.
    7. Take profit on the rest of the trade when the position moves to two times your stop.

    Rules for the Short Trade
    1. On the daily or the hourly charts, place the CCI indicator with standard input of 20.
    2. Note the very last time the CCI registered a reading of less than -100 before poking above the -100 zone.
    3. Take a measure of the peak CCI reading and record it.
    4. If CCI once again trades below the -100 and if its value exceeds the prior low reading, go short at market at the close of the candle.
    5. Measure the high of the candle and use it as your stop.
    6. If the position moves in your favor by the amount of your original stop, sell half and move the stop on the remainder of the position to breakeven.
    7. Take profit on the rest of the trade when position moves to two times your stop.
     
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