As a trader, I have 3 objectives.
- Find winning trades
- Stay out of losing trades
- Rinse and repeat
A breakout strategy is a technical strategyto help a trader stay away from SOME losing trades. It is important to note you will still have losing trades with a breakout strategy. However, my point here is that with a breakout strategy you can be wrong on the trading idea and be kept away from SOME losing trades which reaches objective of #2 above.
On January 11, 2012, I published an article on buying the USDCHF based on a breakout type of strategy. Since the published date of that article, the USDCHF has dropped approximately 250 pips. I was clearly wrong on my trading idea as the exchange rate moved lower rather than higher.
However, since the strategy called for a break above the upper Donchian channel AND since price never did break higher, I was kept out of entering into a losing trade. That is a good example of how I was wrong on the trading idea, but was kept away from a losing trade.
Now with prices much lower than before, the trading idea is still valid. This presents an opportunity to buy the currency pair at a much lower price. To do so, we simply use the upper channel as my entry trigger. The upper channel currently sits at .9524 so our entry order to buy would be at .9525 (1 pip above the upper channel). If prices do not push higher, then I continue to be kept away out a losing trade.
The last piece of the puzzle for a trader is to determine what trade size to place in your account, or how much effective leverage to use. An aggressive trader may utilize effective leverage amounts closer to 10 to 1. More conservative traders my utilize 3 to 1 or less.
To learn more about trading with the Donchian channels and the strategy, join us for a live webinar inside DailyFX Plus at 9pm ET on Wednesday January 25.
---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education
To contact Jeremy, email email@example.com. Follow me on Twitter at @JWagnerFXTrader.
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