Tag Archive for: tailed bar

Trading Breakouts (Strategies, Patterns & Price Action)

What’s Inside Today’s Trading Article?

  • Let’s talk about breakout strategies
  • What are some consistent breakout patterns?
  • When trading breakout patterns, how can I avoid false breaks?

Ever heard the statements “most breakouts fail” or “you should avoid trading breakouts“?

Let me just put the kibosh on that by sharing with you Exhibit A.

Behold…Exhibit A – winner of the 2017 World Cup Futures Championship, Stefano Serafini, who won with an impressive +217% return (see below).

stefano serafini breakout trader 2ndskiesforex

What was Stefano Serafini’s main trading strategy to generate such an impressive return? Trading intra-day breakouts!

So do me a favor, the next time you see some fake trading guru telling you “most breakouts fail” or “you should avoid trading breakouts“, please share the link to this post.

For today’s article, I’m going to share with you two breakout strategies to help increase your accuracy & profitability in trading breakouts. I’m also going to share how you can use this to avoid any false breaks and getting stopped out.

Let’s jump in.

Breakout Strategies

While there are many types of breakout strategies you can classify breakout trades into two broad categories:

  1. The momentum breakout setup
  2. The breakout pullback setup

For today’s breakout trade article, we’re going to focus on the second breakout strategy (breakout pullback setup) as it’s much easier for traders to learn and execute because it requires less skill.

NOTE: If you want to learn how to trade momentum breakout setups, then check out my Trading Masterclass course where I teach you how to trade this for maximum profit.

The Breakout Pullback Setup

Before you can even make a breakout pullback setup, you’ll need to identify some of the consistent breakout patterns that manifest in the price action.

By learning these, you’ll be able to identify A+ setups which will increase your accuracy and profitability in trading them.

There are many things you can do to identify an A+ breakout pullback setup, but there are 2 things I’ll give you to work with for now.

Breakout Pattern #1 – Finding a key support or resistance level with a minimum of two touches

Why two touches?

While the market may hit a key support or resistance level once, which indicates at least some potential order flow and institutional players wanting to hold that level, two touches indicates a greater probability and amount of order flow behind that level.

trading forex breakouts 2 touches 2ndskiesforex

The more buyers/sellers you have at that level, the greater the chance the breakout trade will succeed.

Why?

One reason is those same players who, when they get stopped out after their support or resistance level is broken, them getting stopped out clears out some of the order flow against that breakout, thus making it easier for the breakout to continue.

On top of this, smart money players after they’ve been taken out (and spot a good breakout) will often flip sides after they get stopped out, thus providing further momentum to your breakout trade.

Hence it’s important to identify a level that has a minimum of two touches (the more, then better) to increase your probability of a breakout setup forming.

Breakout Pattern #2 – A reduction in the reactions (or pullbacks from that support/resistance level)

Why does a reduction in the pullback from a key support or resistance level help your breakout trades?

Let’s say the market is in a bull trend and it’s encountering a resistance level where there are likely bears with offers up at that level. If the bulls hit the resistance level the first time, and the market pulls back say 50 pips, then when the 2nd time the price action hits that resistance level, the market only pulls back say 25 pips, this indicates a weaker reaction by the bears at the level.

A weaker pullback from the bears = less order flow and strength on their side. As their side continues to weaken, this a) gives the bulls more confidence a breakout is becoming more likely, and b) communicates their side is losing the battle.

Looking at our prior chart, notice how the reactions/pullbacks to the resistance level were weaker the 2nd time around?

trading forex breakouts two touches 2ndskiesforex

Those weaker reactions were communicating how the bears were less able to push back while the bulls kept their foot on the gas, producing an eventual breakout.

Below is another good example of the two touches + weaker reactions to the resistance level on the USDJPY, producing a +125 pip breakout.

forex breakout setups 2ndskiesforex

Hence, make sure to look for weaker reactions each time off a key support or resistance level to identify a high probability breakout.

Key Tip: One additional pattern you can apply in the price action is to look for breakout setups that are forming with trend vs counter trend.

Now that I’ve shown you two underlying components of a breakout strategy, let’s talk about how you can get in on a breakout pullback setup.

The Breakout Pullback Setup

Assuming you’ve found a situation whereby you have the minimum two touches off a key support or resistance level, along with weaker reactions to the level each time, let’s talk about how you can get into a breakout pullback setup and how I trade it.

Once the market and price action has closed above your key support or resistance level, I’ll place a limit order on that particular support or resistance level to trade in the direction of the breakout.

NOTE: I am not waiting for a confirmation price action signal to form on that level. If you’ve read the price action context correctly, and found a legitimate breakout, any confirmation price action signal will only give you a weaker entry, and thus reduce your profitability.

If you learn to read the price action correctly, you won’t need any confirmation price action signal to get in the market, because the underlying order flow from the big players will already be there.

When I’m trading a breakout pullback setup, once I’ve qualified the breakout, I’m placing my order to get long/short on a pullback to the level.

If the order flow at that level is legit, there will be larger players willing to get long/short at that level without the need for any pin bar, inside bar or ridiculous tailed bar.

Case in point, watch this video on me doing a live breakout pullback trade on the NZDUSD for +100 pips of profit with only a 29 pip stop loss.

Notice how there were two touches on the support level near 6625, along with each bounce getting weaker. Once the market broke through the level, I placed my order to get short.

After pulling back to my level, and barely going negative, the pair took off for over +100 pips of profit.

Had you waited for any confirmation price action pin bar signal, you would have a) gotten a worse entry, and b) had less profit potential.

You can see another example of a live trade using a pyramiding trading strategy where I get in on the breakout pullback setup to the level on both trades, stacking onto the same with trend move for extra profit.

After watching the two videos, hopefully these examples give you a good idea of how to trade the breakout pullback setup.

How to Avoid False Breaks?

There is a lot that can be said about avoiding false breaks when trading the breakout pullback setup, and there are many breakout patterns that often fail.

false breakout patterns

To keep it simple, the best thing you can do is:

a) learn to read price action context, and

b) trade with trend as much as possible

By learning to read price action context, you’ll have a better grasp at finding key support and resistance levels where there is a lot of order flow around that level. You’ll also be better able to spot with trend environments, which are much more favorable for breakout trade setups. This is because there is a greater amount of order flow in your favor to support your trade.

In Summary

To recap, trading forex breakout patterns can be a highly profitable trading strategy when you learn to identify A+ breakout setups. There are two classifications of breakouts, which are a) the momentum breakout setup, and b) the breakout pullback setup.

There are also key breakout patterns you can spot in the price action which will help you find higher probability breakout trades.

In the beginning, try to trade breakout pullback setups as they require less skills, and will help you build your confidence in trading breakouts over time.

Lastly, when trading the breakout pullback setup, make sure NOT to wait for confirmation price action signals as they’ll give you a worse entry (trade location) and reduce your profitability.

Now Your Turn

What did you learn from this article that helped you with trading breakouts in the forex market (or any market for that matter)?

Did you find this useful and give you some increased confidence to trade breakouts?

Are you currently trading breakouts and struggling?

Please make sure to leave your feedback and comments to help us create better trading articles and content for you.

Until then, may good trading setups and karma be with you.

Kind Regards,
Chris Capre

Pin Bar Trading: How You Can Use it to Find Likely Turning Points

Today I am going to discuss Pin Bar trading, which can give some insight into a potential price action reversal, entering traps, and getting into trends.

In this article, I will specifically talk about how you can use it for aiding your key support and resistance levels to find likely turning points.

I’ll also talk about what a pin bar is communicating from a price action and order flow perspective, and how to trade them.

The term was originally penned by Martin Pring calling it the Pin Bar, which stood for ‘pinocchio bar‘ or a bar that is telling a lie.

Why?

Martin had noticed that these types of bars come up in strong trending moves, but what they do is initially create a break of the highs or lows for the move, but then break back into the range of the prior candle.

This break of the highs or lows is the ‘telling a lie‘ part of it, trying to get short term traders in on the break.

When the candle breaks back into the range, they are then trapped and if the price action continues to break in the opposite direction of the trend, then those traders who are trapped have to exit their longs/shorts, thus helping fuel the reversal.

But lets take a look at a general pin bar in the image below.

pinbar trading price action forex pinbar patterns 2ndskiesforex mar 19th

Looking at the image above, the blue bar at the bottom is a pin bar, which generally should open inside the body (and/or wick) of the prior bar.

The pin bar itself should form a new low in a downtrend, or a new high in an uptrend.

This is what creates the ‘trap‘ for the traders that entered short on the break below the lows. With the bar closing up, the new shorts are now trapped and if price climbs enough, they will have to exit for a loss which will help fuel a price rise and the reversal.

Now lets take a look out a little further at this pin bar in the context of the price action around it with the chart below.

pinbar trading forex price action pinbar setups 2ndskiesforex mar 19th

Now that we see the larger picture here, price was selling and then formed a SL at .8100.  Price then bounced to .8275 where it ran into resistance and created a pullback from the SL.

Price then sold off for 8 candles (32hrs) only to run into a pin bar a prior support level, giving us a really good price action trigger to go long and reverse this move.  Let’s see how it played out in the following chart.

pinbar price action forex trading pinbar trading 2ndskiesforex mar 19th

After selling off for 8 candles and 32hrs straight, price action then formed a pin bar, which was the low in this move reversing 90 of the 130pip sell off (over 61.8% of the move).

We actually blogged about this trade ahead of time and many of our price action traders got long on this one for a nice 3:1 reward-risk setup.

We placed our entry on a small pullback into the pin bar, and targeted .8225. Price went about 10pip past our entry and then encountered a new wave of selling.

But as you can see, the pin bar itself was the key price action trigger in setting up this reversal.

Let’s take a look at another example, then we will talk about finding a good entry for the pin bar along with time frames.

pinbar forex price action pinbar trading 2ndskiesforex mar 19th

Here is the EURUSD on the 1hr time frame.  Price has been climbing for over a day from 1.3140 – 1.3290 and then forms a pin bar at the top of the uptrend.

Notice how in forming this pin bar, price had already been struggling around 1.3270/80 to make any new significant highs.  Let’s take a look at how price action responds to this pin bar formation.

pinbar forex price action strategies price action trading 2ndskiesforex

Looking at the chart above, notice how after forming the pin bar, price then formed an inside bar right after the pin bar, telling us there was definitely a pause from the pin bar rejection which is interesting since

a) price was already struggling around 1.3270/80 and

b) the bulls had been in control for so long

Where did they go all of a sudden?  This should have been a clue the market was about to reverse and the pin bar was the trigger.

Price then traded sideways for a few hours, but then sold off heavily shedding +180pips from the pin bar highs giving a highly profitable trade with very low risk so hopefully this gives you an idea of the pin bar formation as a whole.

Pin Bar Entries

In terms of finding a good entry, one method is to take a pullback into the pin bar itself, but this should always be based upon the order flow around the pin bar and the key levels around it.  If the bulls/bears are in control at the time of the pin bar, there is a good chance they will attempt to break the highs/lows of the pin bar so a pullback gives a nice option to get in the market.

There are actually many pin bar entries, and they should depend upon the context of the price action around and leading up to the pin bar itself.

Depending upon how the price action is leading up to it and around it will determine and communicate what is the best entry, but the pullback is one solid option you can use for now.

In my price action trading course, I actually discuss how to quantitatively break down a pin bar as we have tested over 10yrs worth of data on over 15 pairs, totaling over 100,000+ pin bars.

From this information, we were able to come up with a very precise definition of a pinbar, along with giving you exact entry parameters for each type of pin bar, and how to find optimal targets.

One methodology suggested has been to find a 2:1 reward to risk target, or next key support/resistance level. But testing has shown this not to be an optimal method for trading this, as many times price can way under/overshoot the target, either leaving you stopped out before your target, or missing out on a lot of potential profits.

Time Frames

In terms of time frames for trading pin bars, they really can be traded on all time frames from the 1min, to the weekly chart.  However, as a pure pattern, testing has shown them to be a lot less accurate on anything lower than a 1hr time frame, so we suggest using them on the 1hr, 4hr and daily time frames if you are only going to trade them as a pure pattern.

We always recommend trading them with price action context, and never just as a pure pattern.

It is not that they cannot be used on the lower time frames, but in isolation, they will be a lot less effective, so you will need to add additional optimizers and parameters to enhance the strength of them.

Also consider on the 1hr, 4hr and daily time frames, more traders will be watching them, and thus get into the trade – likely strengthening the reversal.

Along those lines, think about it this way.  If price action forms a pin bar on a 5min chart, we are talking about a rejection that lasted 5mins.  Think of how many orders or transactions occurred during that time.

Now compare that to 1hr of price rejecting, 4hrs of price rejecting (half a trading session), or a daily pin bar showing price had rejected for an entire day across three different sessions with three different sets of investors all weighing in saying this price rejection was a significant one.

If you consider that, then it makes more sense the 1hr, 4hr and daily ones will have greater strength to them, but again, it all comes down to context

In Summary

Thus as we can see, the pin bar formation is a strong price action pattern communicating a rejection of sorts in finding tops and bottoms, telling us a counter-trend move is likely to begin.

Obviously this is an over-simplification of a pin bar trading strategy, but we can see how it works and understand it from an order flow perspective.

There are many other variables and types of pin bars, which will enhance or weaken the pin bar, such as body size, close-type, prior price action, was it a trap, was it hitting off key levels, etc. In any case, this should give you a good introduction on what a pin bar is, what it means from an order flow perspective, how it works from an order flow perspective, and one way you can trade it.

There are various other pin bar trading methods which use this so should you want to learn more about then, then feel free to check out my Price Action Course. I teach quantitative methods for pin bar trading and discuss live setups all the time.

Other Related Articles:
Intraday Price Action Trading – Reading Forex Price Action
Pinbar Setup NZD/USD Mar. 9th
EURJPY Pinbar Price Action Forex Setup Mar. 7th