The daily high low Forex trading strategy is based on a simple concept: if price breaks yesterday’s high or low, it will most likely continue in that direction of breakout.
That is the common belief but the truth is, it depends.
If you are trading a breakout of a candlestick that is larger than many that came before it, you may actually be taking a trade but get caught in the mean reverting tendency of the market.
This is a basic breakout strategy and I’ve seen a few variations of it throughout the years. It all boils down to one thing:
“An object in motion tends to stay in motion until acted upon by an unbalanced force.”
You can’t argue with the first law of motion but the second part is vital: an unbalanced force.If you are entering a trade after an out sized momentum move in price, an unbalanced force of buyers or sellers (depending on the position) will either take profits or contrarian trade, and force the market to revert.
With that disclosure, do you think there is an edge in this type of trading? You should do your testing but it is possible there is a slight edge – very slight – it buying a high or selling a low depending on how far advanced the trend is.
High Low Breakout Strategy Explained
So how do you trade this then? Well here’s how and the basic entry is quite simple:What you do is place 2 pending stop orders (buy stop or sell stop) to catch whichever direction the breakout happens.
Currency Pairs: Preferably the majors.
Time Frames: I would use this on higher time frame charts – four hour charts and above. I would prefer the daily.
Breakout Rules Expanded
- When yesterday’s daily candlestick closes, place two pending orders on both sides 2 pips away : one sell stop pending order to catch the breakout downward and one buy stop pending order to catch the breakout upwards.
- Place your stop loss halfway distance of that closed daily candlestick.
- Take profit target, average the last 3 days range and use that as your profit targets. For example, if day 1 daily candle range (high-low)was 100 pips, day two had 150 pips and day 3 had 90 pips, then the average of these three days would be 113 pips. So 113 pips should be set as your take profit target.
- Make sure that the Forex pair you are trading is actually in a trending environment or is showing some type of directional bias.
Advantage Of This Breakout Strategy
- Set and forget type of Forex trading system where you only need to check once a day and see how your trade is progressing.
- Good for beginners because its easy to use and understand.
- Stops you from over trading because seriously. Why? Because if you take 10 trades in a day using smaller time frames, you are most likely to suffer a lot of losses compared to taking only one trade based on the daily candlestick.
Why Would You Not Trade This Way
- Large stop loss distances so use position sizing to minimize your risk.
- All Forex trading strategies as usual have limitations and this system is no exception so expect trading losses because sometimes the market will activate one pending order and next thing you know, price is going to opposite direction heading for your stop loss!
