Currency pairs moving within price structures present high-reward trading opportunities. But so do the trends that follow a breakout. Here’s how to capture those.
A price structure is when we can draw trendlines around price movements (highs and lows) and the price is bouncing between those trendlines. A range, wedge, channel, triangle, and expanding ranges are all examples of price structures.
Typically, trades are based on the assumption that the price structure will continue. For example, we may short at the top of a range, or buy near the bottom of an ascending channel. We wait for an entry signal near the trendline or expected area of resistance/support. An entry signal occurs when the pair shows evidence that the price is moving off the resistance/support (edge of the structure) and back toward the other side of the price structure.
This method was covered in The Price Structure Forex Strategy for Big Reward:Risk Trades.
But the price doesn’t always stall and reverse near the edges of the structure. Sometimes the price keeps moving beyond these levels, called a breakout. So the next stage of the strategy is learning what to do after a breakout. That concept is tackled in this article.
Reminder: these price structure strategies are for forex only (not stocks) and are designed for swing trading. Forex price structures are only one way to trade. There are many ways to trade. For example, when I day trade the EURUSD I’m looking for only very specific patterns and only trade those.
Trading Price Structures After a Breakout
If a breakout happens, I let it go. If the price was moving in a big range, I’m not interested in buying as soon as the pair breaks above the top of the range. I just note the breakout, but don’t place a trade.
There are a couple of reasons for this.
- At the edge of the structure, I am calculating reward:risk ratios for if the price structure continues.
- The price may breakout out initially, but it could be a false breakout. In that case, I still want to stay focused on the price structure trade. I don’t want to be flipping long, then short, then long, then short for example, as the price chops around near a price structure edge.
- If an actual breakout occurs, and the price runs well beyond the prior price structure, there will likely be a new trading opportunity, in the new trend direction, soon.
That last point is the focus of this article.
Once a breakout occurs, the price has shown that it had enough force to break out of the prior price structure and is now likely trending in the breakout direction.
Following the breakout, we can then look for a shorter-term price structure that shows how the price is trending (I use the 1-hour chart usually).
Before we can have a breakout, there needs to be a price structure to break out of. Here’s an example in NZDJPY (this trade ends up being a loser).
While the price is in the range, I commit to looking for longs near the bottom and shorts near the top. I am not concerned with a breakout at this point.
That is what I did here. It worked out well at the bottom of the range. Then at the top of the range, there is a false breakout to the upside the price starts dropping off the top range. I shorted, but the price didn’t keep dropping. Instead, it dropped a little and then ran back to the upside, breaking out of the range (shown in next section).
Currently, I focus on day trading forex. Want all my favorite EURUSD Day Trading Strategies in one place, along with guidance on how to stay in a peak mental state while trading? My EURUSD Day Trading Course shows you how to find and trade high-profit patterns in 1 to 2 hours per day.
After a Breakout, Define the New Price Structure
While a breakout is possible, I don’t concern myself with it UNTIL AFTER it happens.
Once the breakout occurs, I can then look for the trend in the breakout direction. For example, if the price breaks out of the top of the channel, I look at the uptrend that started at the bottom of the channel and has now continued above the channel.
Drawing trendlines along the trend, or a regression channel, works well and is what I commonly use.
On the chart below we can see that the price did indeed break above the top of the range. I want to see the price move well beyond a price structure before I consider it a breakout.
I have drawn a regression channel from the last swing low up to the most recent price bar. We now have a price structure for trading the trend that the breakout generated. Prior to this, the range was the dominant structure, but with the range broken, this new structure becomes the one to focus on.
With the new price structure drawn, look for trades near the edges. For example, on the chart above, look for a long trade signal near the bottom of the ascending channel, which also is near the bottom of a short-term range. The bottom of the short-term range also provides a potential entry. [You can draw the channels within larger price structures anytime. They may help you find some other short-term trading opportunities.]
The red and green boxes mark trades: red is the difference between the entry and stop loss, and green is the difference between the entry and the profit target.
The two red and green boxes drawn on the far right are hypothetical trades that could occur in the future. (at the time of the screenshot)
Based on the strategy, during an ascending channel we can place a profit target just above the prior swing high. But we also have a short-term range, so the green boxes on the chart above mark the two potential profit targets. When two options are present, consider exiting half the position size at the first target and the remainder of the position at the second target.
In the case above, it could more than a week for the price to pull back to the bottom of this channel (update the channel as the price moves). But smaller channels formed in the meantime providing a number of shorter-term opportunities.
Another example is below. The price was moving in a narrowing range or triangle. It then broke to the downside. We can draw in our trendlines or regression channel and look for an opportunity to enter near the top of the channel. We can also see a range forming, with the price currently near the prior swing high. A range is a price structure, so there is also the option to short there in alignment with the current downtrend.
Note that price action can change. Update your price structures as the price action unfolds. Also, new structures are always forming. Like in the chart above, a range recently formed, and there is a descending channel. Either could provide potential trading opportunities. Adapt to what is going on by noting the various structures that are playing out.
You can use regression channels or draw your own trendlines. The above charts are just examples. Each one contains multiple structures.
If there is no discernible price structure, then don’t use this strategy!
Here’s a video on trading the price structure after the breakout (includes a few extra tidbits not included in the article).
Early Exits, Trailing Stop Losses, or Leave Alone?
A good entry with small risk can result in huge reward-to-risk trading opportunities.
There are many different types of trailing stop losses. Some may work better than others, but all of them will end up kicking you out of many trades before the big win is attained. Although, you may lock in a few more small winners compared to doing nothing with the trade (letting it hit the original stop loss or target with no trading stop loss).
Before using a trailing stop loss, consider this:
No matter how the trade moves, your maximum risk is 1R. If you get out of a trade early, you could be giving up 2R, 5R, 10R! The amount you could be giving up is almost ways much bigger than what you could lose.
R just means a risk unit. For me, R is 1% of my account. So the risk on each trade should equate to 1% of my account. Therefore, my reward to risk is simply a multiple of risk. This is discussed in the position sizing article.
Lessons from published trades revealed that leaving the trades alone was better than using a trailing stop loss. The possibility that the trailing stop loss cuts your winners means missing out on way too much profit potential. Plus, leaving the trades alone is the easiest. Set the trade and then forget about it…you don’t need to (and probably shouldn’t) even look at it. Plus, actually capitalizing on those huge reward:risk trades every once in a while can produce BIG monthly returns.
Getting Better at Trading Price Structure and Breakouts
Like anything, to get better you will need to practice. But don’t try to practice every price structure in every condition. Instead, decide on a few price structures you will trade, and stick with those. Get better at trading them by finding ways to improve entries, reduce stop loss size, and improve win rates or risk/reward. This is discussed in Steps to Becoming Profitable Quickly.
Also specify how you will determine what pairs you will trade, and in what situations. Deciding when not to trade is just as important as determining when you will trade.
Want all my favorite EURUSD Day Trading Strategies in one place, along with guidance on how to stay in a peak mental state while trading? My EURUSD Day Trading Course shows you how to find and trade high-profit patterns in 1 to 2 hours per day.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.