Front-Running Consolidation Breakout Forex Strategy

Screen Shot 2014-06-17 at 11.12.19


Video Transcription:

Hey, traders. Welcome to video 21 of the Advanced Forex Strategies Course. This is Cory Mitchell. In this video, we are looking at front-running consolidation breakouts. We can use it on all timeframes. Brought to you by

So trend trading is where the money is. Breakouts provide a way to enter the next trending move, but we don’t always need to wait for a breakout to initiate the trade. So this is going to sound a lot like the chart patterns and front-running chart patterns breakout that we looked at in video 20.

This little bit more lenient in the sense that we don’t need an actual chart pattern to develop. All we’re doing is looking for a trend, a consolidation within that trend, and we are looking for a breakout, anticipating that breakout from the consolidation. By anticipating the breakout direction, we get a much better price than the breakout . . . than the actual breakout price or the patient breakout entry price.

We only trade consolidation breakouts in the direction of the current trend. So this makes choosing the direction of the breakout easier and higher probability. So since we are entering before the breakout actually occurs, this makes it much easier. We just isolate the trend. If we have a downtrend followed by a consolidation, we expect the next move to be down, and we’re trying to enter during that consolidation to give ourselves a good entry price for that next move down. This provides a very tight stop.

So front-running consolidation breakouts will rely heavily on your ability to read velocity and magnitude of price waves, as well as trends, trend channels, strong support, and resistance. So we can decide which consolidations to front-run and which we want to leave alone.

Even if wrong, our risk is very small. So we don’t have to be perfect with this strategy. We’re not going to be able to anticipate every single one accurately. Sometimes we’re going to be wrong. That’s okay. The reward is much greater than the risk. So it works out okay.

A trend must be present, preferably a strong one. We’ve got to go back to the velocity and magnitude video if you’re still unsure of how to spot trend changes in real-time and determine the strength of a trend. Enter near the opposite side of the anticipated breakout. So if we’re in a downtrend, we have a pullback and a consolidation, we want to enter near the top of that consolidation, giving us the best entry price for a move lower. The trend is up, we have a pullback lower, we want to buy near the bottom of that consolidation, so that we have the best entry price for the anticipated move higher.

We’ll typically need to see at least a few price bars of swings before we can establish an approximate entry area. You will get better at this as soon as you see a consolidation starting to form, based on your ability to read the price action, velocity, and magnitude. You will be able to say, “All right. I want to get in right at the low of this bar,” put out your entry order, and you’re willing to take that risk that that’s a good entry point. You’re willing to do that because you know that your risk is very small, and your profit potential large.

Stop is placed just outside the entry order or the anticipated extreme of the consolidation. So you’re anticipating where that consolidation is going to end, so to speak, the distance of it or the width of it, and you’re putting a stop just outside of that.

Use the distance measurement target based on the height of the recent trending wave. So this is similar to the approach we used for flags and pennants. As always, we can just use the 1.6, 2.6, 3.6 times the risk, but I really do encourage traders to hold at least part of their position for this distance measurement target, especially when it’s big.

We’re going to look at one where the reward to risk is almost 10 to 1. That means the reward for a winning trade is 10 times greater than your risk. Those are pretty rare opportunities. When you see them, you want to hold at least part of your position for that gain.

So if you set up . . . We’re not going to spend too long on these since it is similar to a lot of the things we’ve covered in prior videos. This is just tying it a bit more together. So we can see overall down movement. This tried to go higher here, couldn’t, then creates a lower low. So really looking for more continuation to the downside. We have this consolidation here. We want to enter right near the top of it. So as soon as we have this potential sideways movement, we can put out an entry order.

In this case, if you said, “I assume that the high of that red bar is going to be about as far as it goes,” then you would have put out your entry to go short in this white box here, within a few pips of that high. You would have gotten filled right on that little green bar as it popped back in. If you had waited for a bit more confirmation, the price did not come back. So we can actually see that selling is already picking up during the consolidation, and it drops out the bottom.

The target is based on the height of the pattern. As we can see, the selling really starts . . . We’re not going to use the extremes, but this level was touched quite a bit by all three of these bars. So we’re going to start it right there and move it down to right about there, where the selling stalled off. This goes from the top of the consolidation, so a little bit subjective.

Again, if we go right from that bar high, we are getting out at this level. If we view this red bar as the high of the consolidation, which is sort of where the price started moving more sideways, then we’re looking at a target of about here. That last part of the consolidation . . . Target . . . In either case, we’re looking at a target right down in this area here. So we would have been able to get out quite easily on this drop lower.

Stop goes just above wherever we believe the anticipated consolidation is going to end. So if this is where we were putting our entry order, our stop would have gone right about where this red line is, or for a little bit more safety, we could have placed it just above the high of this red bar . . . or sorry, this green bar. So that would have been this red bar here is where our stop would have gone.

Now, if we had waited for an entry price up here at the top of this green bar, which is also a potential area for the top of the consolidation, we would not have gotten filled. The price continued lower, and we wouldn’t have gotten that fill. That’s fine. Sometimes that happens. We can still always trade a breakout to the downside if we miss the trade.

Here, price moves lower, pops back up, comes back down, barely makes a lower low, pops back up, comes down again, no momentum left whatsoever, and makes a higher low then. So this is higher than this. So we have a potential uptrend. When it breaks to the upside, we break this trend line. No momentum to the downside, so we can assume that the next likely move is probably higher.

So at this point, we are looking for buying the consolidation near these lows, this first bar. We have a potential low, especially after this bar. The price is now moving more sideways. Looking at the far right of the chart. Let me get rid of this for now. So we can see the price starting to move sideways. So we can put our entry order out right near the bottom of this bar, expecting a move higher. Would have gotten filled right in here. Stop goes just below, waiting for that breakout to the upside.

Height of the pattern . . . So buying starts right about there, continues up to there, from the low of the pattern, and we’re looking for a target right about there. You can always get out 1.6, 2.6, 3.6 along the way up, and then hold one for this bigger gain. Sometimes it won’t really matter. Sometimes this target could end up being, if we got in right around there, stop is about 6 pips, and target is 23 pips. That would have been about a four to one there. So it would have been worth it to hold one position for that target.

Here, very strong momentum shift erases all that uptrend. So if we go back to velocity and magnitude, this is something that we definitely consider a major shift. We have this strong pop back. But in the whole context, even though this was a big green bar, doesn’t really mean anything because the overall movement is still lower. This didn’t erase anything. So we have to assume the next move is still down, based on the overall move.

Price stalls out right about here and moves pretty much sideways in a very nice fashion. So in this case, we would have had lots of opportunities to get short if we viewed this as our entry area. Stop goes just above. So whichever one we got filled on our stop would have just above the high, looking for that move lower. If we got filled right at the bottom of this box, we’re looking at about a five and a half pip, if we give it a little bit extra. So even that seven pips, looking for a move down.

We are going to measure this move based on where selling starts. A little bit of a pause up top here. Selling really starts on this bar. So we’re only going to use that one, just to be a bit more conservative. The selling pretty much continues right down into that low. So this, run the high of the pattern, giving us a target right about there. So we would have been able to get out on this move lower.

Since it was a big move, we have a big potential target. So this is one of those ones where it really pays off to hold at least part of your position for our, what we call, the measured move. Target, if we got out at 1.6, 2.6, and 3.6 times our risk, 3.6 times seven pips is 25 pips. So if we had gotten in there, we would have been all out of our trades by about here, yet our measured move still gave us quite a bit more profit to the downside.

So we could have gotten out at those targets, but we want to hold at least one for this. Because when we get like a 8 to 1, or 9 to 1, or 10 to 1 type reward to risk trade, we want to be holding for that because they don’t come along very often, and that one trade can erase a lot of losing trades, and also just create a very good day or even a month, in terms of our trading.

So just looking to get in at the top of a consolidation in a downtrend or the bottom of a consolidation in an uptrend, using this measured move tool to anticipate where that’s likely to run, we are trusting the trend that it is going to continue to follow through. So our breakout direction we already know. If it’s a downtrend, we’re anticipating a downside breakout. If it’s an uptrend, anticipating an upside breakout.

So we’re entering at the opposite side of the anticipated breakout, gauged on the individual consolidation, where we anticipate that consolidation is going to be confined to. Stop just outside the entry of the potential consolidation, plus a few extra pips if we want a little bit of margin of safety.

Exit target is the measured distance based on the prior wave, or we can also use 1.6, 2.6, and 3.6. I recommend either just going with the target or using this and the target. So you can get out some at these levels and hold some for this. Quite often, it will be a bigger target.

Risk only 1% of your account on a pair. That way, even a string of losses won’t significantly draw down your account. Trading involves substantial risk of loss. Only trade with capital you can afford to lose and make sure you’re going in to test out these strategies. You’re going to need to isolate those consolidations.

Draw little boxes around where as soon as that consolidation starts, draw a little box around where that potential entry area is. Test it out in a demo account. Start entering some trades. See if you’re getting in on the right side of the anticipated breakout. If you’re not, look back to the velocity and magnitude video. Are you seeing the trend shifts? Are you seeing momentum swings to determine which direction you should be trading? Because the trend isn’t always just the most obvious.

Sometimes we have subtle trend shifts, as we saw in the second example that we looked at. We were moving in a downtrend. We had this shift back to the upside. So we wanted to anticipate an upside breakout, not a downside breakout. So it does take some practice. These are all guideline-based. There’s no real fixed rules. So get in there. Practice in the demo account. Until next time, happy trading.

Comments are closed.