My article in the May 2010 issue of Trader’s Journal was about opening breakouts on the major Forex markets, but it can be used on other markets as well. However in this article, I will explain a very simple and robust breakout strategy with limited and controlled risk that can be used in many markets every day.
Many professional traders use this strategy on a daily basis with a great deal of success in all kind of markets.
It is a daily discipline where, as with most strategies, money management is the most important factor to create profit and control risk.
Many private traders work to create complex strategies trying to make trades successful, but many forget the money management part of the trade.
The major part for this strategy is the High and the Low of the previous day.
The psychology of the trading crowd is usually that if the previous day’s high is crossed to the upside, the general price move is up and the crowd is more likely to buy than to sell.
If the previous day’s low is crossed to the downside, the crowd is usually more likely to sell that market than to buy it.
With that in mind, we have an edge in the market by going long if the previous day’s high is crossed up and going short if the previous day’s low is crossed down.
The crossing of the high or low is not a clear directional signal, but by crossing the high up or the low down, the trader can expect that price will at least go a bit further than yesterday’s high or low.
Of course there are alternatives to this strategy, which is good for the market too!
Some go short when the market makes a new high or go long when the market makes a new low in order to get a better average price, but there is also much more risk involved when using this strategy.
So how can you trade this strategy?
The Forex markets are open 24-hours a day and there is no real daily open or close. However many traders use the opening in Australia and the close in New York (Wall Street close), while Europeans measure the London opening until the New York close as the high and the low for the day.
This is an excerpt from Oct 2011 issue of Forex Journal.
