Forex Mini-Channel Breakout Day Trading Strategy
Getting You Into Big Trending Moves
I designed the forex mini-channel breakout strategy to get me into trending moves when very specific conditions materialize. The day trading strategy relies on strong momentum, a trend and a specific type of pullback to create a trade setup. The setup sometimes occurs multiple times a day for weeks on end, and other times a signal may not occur for several days. The strategy requires volatility, so only use it when volatility is high.
When volatility is low, using another forex day trading strategy.
Forex Mini-Channel Breakout Setup
Strategies require a setup. The setup is the conditions that need to be present in order to take a trade.
The strategy is recommended for the EURUSD during the London session or during the London and US overlap period.
The forex mini-channel breakout strategy requires a strong trending move, either up or down, followed by a tight channel moving in the opposite direction of the strong trending move. For example, a sharp rally higher, followed by a move lower that oscillates between descending trendlines (forming a channel).
The move prior to the channel must be strong. For forex day trading purposes, the price should run at least 12 pips in the trending direction. The pullback that follows should fit neatly within trendlines, and the trendlines should be relatively tight together, especially the longer the trend channel lasts.
Ideally, the channel should be 5 pips wide, or narrower. The price should not make "waves" inside the channel (makes channel too wide), rather it should oscillate very tightly within the trendlines.
The pullback (channel) can't retrace more than 65% of the prior trending move. For example, if the price jumps 20 pips to 1.0520, the declining channel that follows can't drop more than 13 pips (65% of 20 pips) from 1.0520.
If it falls below 1.0507, don't use this strategy.
We want to be on the same side (trade direction) as the traders who are more aggressive. The pullback (channel) is smaller than the initial trending move (65% or less), showing buyers are still in control despite the short-term drop in price.
The small channel means our risk is small relative to our profit potential. This is discussed next.
Forex Mini-Channel Breakout Strategy
Draw trendlines along the channeling price, and make sure the price is contained within the channel (not jumping above or below the trendlines).
If the trend is up, followed by a declining channel, enter long when the price breaks above the channel. Place a stop loss below the most recent low in the channel. Place a target at 3 times your risk. Your risk is the difference between entry point and stop loss.
If the trend is down, followed by a rising channel, enter short when the price breaks below the channel. Place a stop loss above the most recent high in the channel. Place a target at 3 times your risk.
By only trading very small channels--5 pips or so--the distance between your stop loss and entry point is small...only about 5 pips. This is your risk. The target is three times that amount, or 15 pips in this case.
Your target (in pips) should always be less than the size of the prior trending move. If you calculate your risk, multiply it by three, and the result is a larger number than how far the price ran on the last trending move, skip the trade. In this case, the trending move prior to the pullback (channel) should ideally be 20 pips or larger.
The attached chart shows an example of the mini-channel breakout strategy in the EURUSD. The price runs higher, forms a small 3 pip channel (distance between trendlines), and triggers a trade before pulling back too far. Risk is 3 pips, so the target is 9 pips. The target is smaller than the prior up wave (14.2 pips) that started the uptrend, so this is a reasonable target and the trade is taken.
Tying it Together
Assume the price falls 25 pips in a matter of minutes, reaching 1.0620, and the trend is down.
The price starts to pullback in a tight channel. Draw trendlines on the channel, and watch for the price to drop below the channel. Only take the trade if the signal occurs before the price reaches 1.06362 (65% of 25 pips, added to 1.0620). While the channel is forming, make sure your risk is small (tight channel), and that you know exactly where your stop loss and target will go if the trade signal occurs. If the channel is about 6 pips wide, have a stop loss ready to be placed 6 pips above your entry point, and a target 18 pips below your entry point.
This trade requires very specific conditions, and the reason is that if you don't adhere to the guidelines it's easy to lose money with this strategy. The main reason is that the price may move slightly outside the channel, only to move back into it and continue channeling (false breakout--a strategy on its own).
Therefore, look for strong movement followed by tight channels. When strong momentum is present that momentum is likely to spark interest as soon as the price shows any intention (breakout) of moving in the trending direction again.
Don't force this strategy. Have it in your trading tool belt for days and weeks when it appears often, but don't try to trade it on the days and weeks when conditions aren't suited for it.