Range Breakout Trading Strategies
Breakout trading systems are based on a premise that the break of the range favours a continuation scenario. Range breakout trading strategies are often used by market participants to try to get involved at the the start of (what they hope will be) significant price moves. Range breakouts often lead to expansions in volatility with potential for the trader to define risk beforehand.
Range Breakout Trading Entry Criteria
One of my favoured entry strategies it to trade in the direction of the near term trend and use price action confirmation as the entry criteria. The following chart shows a recent example range trade breakout. Let’s now examine the setup:
- Price should be moving in a clear trend before the consolidation phase. I look for this as momentum often precedes price.
- A clearly defined range is then formed with no spike moves out of the range highs or lows (supply and demand temporarily in balance).
- A false countertrend move precedes the actual “with the trend” breakout (not essential but a bonus).
- Price action confirmation likewise precedes the actual breakout.
- The currency pair was moving higher prior to the breakout
- The trading range was not penetrated and was clearly defined. This can lead to orders clustering around the range highs and lows, the longer the range forms for the better
- A small countertrend move preceded the real deal breakout (trapping weak shorts in the process)
- Price action confirmation was seen in the form of a bullish engulfing candle
Range Breakout Trading – Exit Criteria
There is no right or wrong when it comes to exit criteria, Ultimately it comes down to the individual trader and their trading rules. the following points can be considered:
- Some traders look for price to move an equal distance as the range high to low. For example: if the range is 30 pips a 30 pip range is subsequently projected from the breakout area.
- If the trade comes after a strong trend the trader may look to trail the stop loss higher as price progresses. A price based trailing stop can be used (stop loss moved lower under lower highs) or an arbitrary X-pip trailing stop. The trailing price action method would have worked well on the chart below.
- Exits strategies can also range from fixed objective type levels to the utilisation of a time based exit (EOD etc).
- Context is everything and there is no one size fits all approach.
Additional Notes Relating to Range Breakout Trade Strategies
- These breakout trades can be traded in conjunction with additional filters including news (in the direction of the prevailing market sentiment following news), higher timeframe price action, time based breakout (Opening Range Breakouts) and numerous other elements.
- The nature of a trading ranges means that false breakouts are not uncommon. False breakouts are experienced if the price of an asset moves past – and out of – the established range, but subsequently retreats into the range. This is why I look for price action confirmation, you can test different entry strategies yourself.
- Make sure you are trading into clear space, with no immediate support or resistance in between your entry and exit area.
- If you can find these near other confluent areas the setup can be even more interesting (typically trading away from these confluence areas).
- Range breakouts can sometimes coincide with inside day trading setups.
- Only ever paper trade while you learn what works best for you!