My Trade or Fade futures advisory is a breakout trading service; I thought I’d go discuss breakout patterns and trades in a more general way, for those that want to learn about breakout trading-how to recognize and trade breakout setups. If you want to take a trial to Trade or Fade, you can sign up for two weeks of signals free here.
Below is a daily chart of Yen futures. On the Swing Trader’s Insight newsletter, I have labeled the past three sessions as “breakout days”. A breakout day occurs after a market’s range contracts, as both the bulls and the bears won’t commit to moving a market from a short term value area. I’ve circled the three previous bars on the chart; we had a narrowing range Friday, and a more narrow range and doji Monday. Although yesterday saw a slightly lower close, its range was smaller than Monday’s range, so I was still looking for a breakout move today. In fact, all the major currencies had breakout setups today. This coincides with the fact that the FOMC meeting announcement was likely to be a market mover; to be able to anticipate that a breakout move was coming gave you a heads up to look for a potential trade, or at least a warning to be careful if you had a position on, or were planning on trading.
There were a number of ways to play the breakout(I have devoted a separate advisory to trading breakouts); one possibility would have been to buy when it broke over yesterday’s high at 1.0204 (the green horizontal line on the chart). Buying the Yen when it cleared yesterday’s high would have had you going long right after the meeting announcement, and you could have captured a good portion of today’s breakout rally. Had you been in on this trade, the test, and inability of the market to clear last week’s spike high at 1.0474 would have been a signal to take profits.
I start my market analysis by determining whether a market has indications to look for a breakout move, as breakout setups often trump or swamp other chart patterns I look for. Recognizing and anticipating breakout setups can both give you potential trades to look for, and give you a heads up to use care with other trade signals or positions.
3 Narrow Range Days=Breakout
.gif "The Breakout Setup in Yen Futures")
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