Posted by: Bevan | August 10, 2008

Breakout

Well my results have been somewhat flat recently, with no trades really triggering for a little while. It is a problem as frequency of opportunity is really important in a trading system. I still want to employ a longer term trend following system and I believe in the concept of buying dips, and also that trends tend to continue. I think I need to refine my timeframe to create more opportunities for action. Additionally a lower timeframe will mean lower risk parameters.

I have joined IGIndex as a broker. They have a great platform, fantastic intraday charting using the Prorealtime platform which I was already using, and straightfoward service. Also they’ve got true 24 hour forex trading. The only drawback is that they don’t have the CBOT products which I liked trading. Its a bit hard getting data for the UK/European commodities. Although the platform provides charting it doesn’t have volume information which is really frustrating. I believe that volume is a really important component, and for my oscillator in the Triple Screen method I use Alexander Elder’s Force Index which I think is valuable because it combines price action with volume in an easily viewed format.  Its easy to see temporary dips in buying, be warned when the moves are unusually big and might be more than just a dip, and also often to see divergences where force index is returning to neutral but price hasn’t yet recovered which is a good trend continuation signal.

I’m going to use the system on a four hourly basis, with daily charts to determine the overall trend.  I’ve also come to the conclusion that the 22 period EMA is just two laggy on the longterm chart, certainly for current market conditions.  I think a 13 period EMA is more appropriate.

The title of this blog reflects a new addition to my trading arsenal.  The breakout is one of the best means of trade entry.  It doesn’t rely on any lagging indicators, and a lot of the most successful mechanical systems utilise them as a means of entry.  The factors affecting their success are the probability of continuation, selection of initial stop, and profit target.  I’ve always been intrigued by the overnight range breakouts in the forex markets, and I’ve started employing a system of Philip Newton’s.  I’ve tweaked the money management side a little, as I don’t believe in taking any trades with less than a 1:1 ratio.  Thus I identify the overnight range and look for trades in the direction of the trend.  These are best taken long at the top of the previous day’s range, and short at the bottom of the previous day’s range.  Once the breakout occurs I drop down to the 89 tick chart and wait for a reversal.  I then enter the trade in a 1-2-3 reversal.  The stop is placed at the most recent swing high.  Two thirds of the position I take off once I’ve made the stop distance plus the spread (Phil Newton takes profit on the first two thirds at half the stop distance).  The last third is exited at a target of the average daily range.

I haven’t had much of a chance to trade the setup yet but I like the logic of it, and it certainly allows me to participate in some big moves.  The key is having the opportunity to trade this while I’m at work.  Hopefully there are some good moves off the UK open!

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