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Trade Forex Breakouts Using Inside Bars

By , Forex Trading Instructor
11 March 2013 19:00 GMT

Article Summary: Creating a Forex trading strategy does not have to be a difficult process. Today we will review a simple breakout strategy using inside bars.

Breakout trading is easily one of the most popular options for approaching the Forex market. Breakout traders at a glance will look for price to make a higher high or lower low before entering into the market. While selling low and buying high may seem counterintuitive for new traders at first, breakout trading can be a great way to approach markets. Today we are going to review the basics of breakout, while implementing an inside bar trading strategy.

Identifying the Inside Bar

What makes an inside bar trading strategy so attractive to new traders is that inside bars can be identified without any difficult forms of technical analysis. All that is needed to get started is a current pricing chart and the ability to identify previous highs and lows. Let’s take a look at an example.

Below we can see an example of an Inside Bar forming on a USDCHF Daily chart. Our analysis begins by pinpointing the previous bars high and low. Currently the high for the previous daily candles resides at .9551 while the low sits at .9417. It is important to remember both numbers as today’s price action should not break above the high or fall below the low. If price remains inside both values, our inside bar will be confirmed.

Learn Forex – USDCHF Inside Bar

Trade_Forex_Breakouts_Using_Inside_Bars_body_Picture_2.png, Trade Forex Breakouts Using Inside Bars

(Created using FXCM’s Marketscope 2.0 charts)

Entries with OCO orders

Once an inside bar forms on the chart, we can then proceed to trade the market using a breakout strategy. Inside bars lend themselves to breakouts because the previous high and low values mentioned above will act as support and resistance levels. If price breaks above the high at .9551 traders will want to look to buy. If price falls and drops below the .9471 low, traders will look to sell.

One way to setup for a breakout is through the use of an OCO order. An OCO order allows us to set both a buy entry over the previous high and a sell entry below the previous low at the same time. Using an OCO entry is a benefit to traders because it will allow traders to be ready for a breakout in either direction, by placing both a buy and sell entry. In the event that price breaks out, the OCO order will execute the appropriate entry order while canceling the other from your pending orders list. Once entry values have been determined, traders can then plan on how to exit their breakout trade.

Learn Forex – USDCHF Breakout Entries

Trade_Forex_Breakouts_Using_Inside_Bars_body_Picture_1.png, Trade Forex Breakouts Using Inside Bars

(Created using FXCM’s Marketscope 2.0 charts)

Exiting Positions

When trading any breakout strategy, there is always potential for the market to reverse and cause what is known as a “false breakout”. Due to this distinct possibility traders should always attach a stop order with their OCO entry. One easy way to identify where stops may be placed is to identify the mid-way point between their appropriated buy and sell entries. Limit orders to take profit can also be extrapolated from this value. Traders can take their stop value and extrapolate the amount of pips they are risking to form an appropriate risk/reward level for their trade.

---Written by Walker England, Trading Instructor

To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.

To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to WEngland@FXCM.com .

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11 March 2013 19:00 GMT