Anticipating Chart Pattern Breakouts
Hey, traders. Welcome to video 20 of the “Advanced Forex Strategies Course.” This is Cory Mitchell. In this video, we are looking at front- running chart pattern breakouts, continuing to build on our skill at reading price action. We can use this on all timeframes, brought to you by Investoo.com.
So, trend trading is where the money is. Breakouts provide a way to answer the next trending move, but we don’t always need to wait for a breakout to initiate a trade. Front-running a chart pattern breakout is anticipating a breakout direction, so we get a much better price than the breakout or patience breakout entry price. This provides a very tight stop and we can lock in some profit even if there is no breakout.
So, front-running chart pattern breakouts is going to rely heavily on your ability to read velocity and magnitude, as well as trends, trend channels, isolating strong support and resistance levels, so you can pick out the probable direction of the breakout. If a wrong risk is very small, we’re going to enter near the opposite side of the anticipated breakout. So, let’s say it’s a triangle pattern. We think the breakout is going to be to the downside. That means our entry is going to be right as close to the top of that triangle pattern as we can get.
We’ll typically need to see at least a few price swings before we can establish an approximate entry area. So, if we’re using that triangle as an example, by about the third wave on the top and on the bottom, you can start to see the pattern of where the price is likely going to end up. And then that, you can estimate where to put an entry order. Or you can actively watch as the price approaches the top and then starts to fall back toward the bottom, you can enter your short position anticipating that breakout to the downside.
So, we can use the distance measurement target based on the height of the pattern. This one works for the “head and shoulders” pattern, triangles, flags and pennants. We can also use the 1.6, 2.6, 3.6 times our risk. If you’re not sure exactly which target method to use, then that one is pretty much a safe one that you can always use in pretty much any circumstance.
If the price doesn’t break out as we anticipated and then turns back, so we’re expecting a breakout lower. Let’s use that triangle again. We entered near the top of the triangle, we expected to breakout, but instead it pauses at the bottom of the triangle again and starts to bounce back up, we get out, we take our small profit and we’re out of the trade. We can look to enter again if we still want to take the trade. Or we can just wait for an actual breakout or a patient breakout entry.
I’m using a one-minute chart just because I’ve used a lot of hourly charts and four-hour charts. So, I’ll drop down to a one-minute Euro/USD chart for these. So, chart patterns, as I mentioned, anything that resembles a range, a flag, a triangle, head and shoulders pattern.
Here, we want to anticipate the breakout direction of this instead of just waiting for the breakout. Especially on a one-minute chart where the moves aren’t always that big. Any advantage we can get, our entry price is definitely beneficial. Let’s move that for a moment.
Here, after the price has made about three highs, if we’re looking at the very far right of the chart, we start to see that there’s a pattern here. It doesn’t necessarily mean that it’s going to continue. But we do have a pattern there and it is tradable. So, we can put out an entry order right below where we think that high is going to be as the price moves up there the next time. So, we can put that entry order right about there.
As the price moves lower and then back up, we’re pretty sure it’s likely to test that trend line again. If it does, we’re going to get our short position near the top of that and we’re anticipating this future breakout.
Why are we anticipating to the downside? If you recall from “Velocity Magnitude” video, also the “Snap Back” strategy, “Cup and Handle” strategy, we’re seeing a very strong move up here. This next move is much weaker. It is much smaller than this prior run that we had here.
Also, we have this lower high. The price pulls back. It tries to make a higher high, it can’t and then makes a lower low. So, it dropped below the last wave, indicating that there’s more selling pressure here again than there was buying. So, once it drops below that low combined with this low or high, we have some evidence to suggest that this is a consolidation before the price drops again. So, this is where the chart reading ability comes in, where you need to estimate or guess which direction the breakout is going to be.
So, our entry right up here underneath the trend line, we want to go short in anticipation of that breakout. Let’s say you had a different opinion and you thought this was going to break out higher, it would have been the same process. You can see this price making similar lows along this trend line. So, you can put a “Buy” order right along the trend line here. Stop just outside that pattern and then, you would have anticipated the upside breakout.
So, we are short right here. You can see the little arrow there. And we put our stop just outside the pattern. So, we don’t expect this to break to the upside, so we can keep our stop very tight. On the one-minute chart, this is going to be very small, about two and a half PIPS. On an hourly chart, it would be probably about 20 PIPS or maybe 15 PIPS. You’d have to estimate it just based on the pattern that you’ve drawn, that stop is going to go just outside of it.
We can use the measured move tactic for establishing our target. If you recall for this type, this would resemble a pennant-like pattern. So, we can measure the former move, which was this wave here. Not including the extremes. So, from about there to about there, from the top of the pattern. So, we now know the high of that, so we can put it right off the top of that pattern and there would have been our exit right there.
Or we can use the 1.6, 2.6, 3.6 times our risk. So, in this case, we’re looking at only about a 2.5 PIP risk. So, our, let’s say 2.5 times 3.69 PIPS from our entry. So, we would have got out of our last trade right about at the same level that we got out with our measured move. But we would have got out all along the way at 1.6 and 2.6 times the risk. So, 2.5 PIPS, which is our stop, times 1.6 and times 2.6.
In the event that this had not broken out and paused again similar to what it did here and then popped higher, instead of waiting to see if it stalls up here, I would just cut the loss or take the small profit right away. So, as soon as that price starts to bounce, it didn’t do what we anticipated. We were expecting a downside breakout and it didn’t come. So, we cut the trade quickly and then we can look to reenter again up here if we still like the trade in anticipation of the downside breakout. Or we can just wait for the actual breakout.
A similar pattern here again. Not a lot of movement coming in to . . . this is the start of the U.S. session. So, pretty choppy trading. Then, we have this move higher, followed by a consolidation.
Similar to this, this is a tighter pattern than this was, but it still gives us the same setup. Once we have a few of these bars moving back and forth in a tight fashion, we can put an entry order right along the bottom of that bar expecting the price breakout.
Given this rally higher, we have no reason to expect, based on anything we’ve seen here, especially that we just broke out of this, sort of, sideways, choppy trading. That this is going to do anything but go up. So, we almost have no reason to wait for a breakout, since we want to get long. And the price has shown a tendency to stop dropping along this trend line. So, we can put our entry right along the bottom of that trend line, wherever that may be. So, once we isolate it, wherever that trend line is, we can put our order right there. Stop, once again, goes just outside the pattern.
We can place the order in advance, or we could also just be what I call an “active entry”. So, once the price comes down, tests this trend line and then starts to bounce on this bar, you can just click “Market buy” and get in as the price is popping off that bottom.
So, risk again, here, would be very small because this is a one-minute chart. So, if we had got in right around there, once again, we’re looking at about a two PIP stop. If you’re looking at an hourly chart, that’s more likely to be about 15 or 20 PIPS. And we can get out at the 1.6, 2.6, 3.6. So, we would be out pretty quick on this one. Probably all out of our positions by about here. If we used the measured move approach, price stalls out about there and starts right about there where the buying momentum picks up. So, we can add that to the bottom of the pattern. And with that one, we’d be all out of our positions right about there.
Here again, we have a triangle pattern. The price drops down, rallies back up. Drops down, rallies back up. At this point, this is where we can draw our trend line.
We could have anticipated it here as well. If we did, that would not have been a profitable trade. It would have popped out and we would have been stopped out. But once we have that third wave come through, we now have an estimate of more what the price is doing here. We see it’s respecting this bottom trend line and also moving within this upper trend line. So, by this fourth wave that shows up, one, two, three, this is the fourth wave. We can look to get in around the top of this triangle pattern in anticipation of a downside breakout. We’ll go over in a second why we would consider that a downside breakout and not an upside breakout.
So, once again, you could place it a couple PIPS inside the pattern. That’s only about half a PIP inside. So, if you had based it about two PIPS inside the top of this triangle, you would have gotten filled. Or you can look for the active entry. By “active entry,” I simply mean you watch for the price to come up toward this trend line and as it soon as it starts to drop away, you hit “Market Sell.” So, you would have got in short once this started to drop away. Probably right in about this area here, you would have gotten short.
Place a stop just outside the pattern. And we’re looking for a continuation to the downside. So, a measured move for the triangle is the height of the pattern. But it just barely got any load on this wave here.
So, let’s look at potential reasons why this would be a downside breakout instead of an upside breakout. If we look through the morning, we are in a resistance area that the price has been respecting.
So, the price in the morning came up here, dropped off of it, tried to test it again, fell off of it. Rallied strongly, broke just above that former high, but then couldn’t sustain it. So, we can’t consider that an actual breakout. And the price is now dropping as it’s forming this triangle. So, the price is actually moving a bit lower.
So, this would indicate that this resistance area is a strong area and is holding. Therefore, we do not take long trades into strong resistance areas, as I covered in the “Support and Resistance” video, just as we do not take short positions into strong support areas. So, we have another strong support area down at the bottom here. We can see this price area has rejected the market multiple times and caused it to bounce. So, we would not want to take a short trade here, for example, expecting it to fall through, simply because we would be taking a short position into a strong support area, which we don’t do.
So, here, based on everything that we know, the most logical thing to do is to go short. And the best place to do it is right at the top of that triangle because we have a pattern established. We can easily keep our risk very small and keep our target a good size compared to our risk.
A little pattern here. We could anticipate the downside breakout again, simply because we have some room down to this support area. We don’t want to take it very close, but in this case, we have some more room. This would be a very small pattern likely not even worth trading. But if we saw a similar pattern on an hourly chart, it would be. So, this whole thing is only about two PIPS, meaning our target from the breakout of the pattern would be about two PIPS. We’d be looking to enter right at the top of this pattern.
It broke out about a PIP or so before dropping. So, that is a debatable one on whether we would have got stopped out or not if we had placed our stop just outside. Entry here. But even if we do get stopped out occasionally on these, the reward is greater than the risk. And typically, our risk is going to be very small so it’s okay if we get stopped out. We don’t need to be perfect all the time.
And this one eventually broke back to the down side. We can see our current momentum is down. Nothing really to indicate movement higher as of yet.
So, that’s how we trade the front-running chart pattern breakouts. We’re just anticipating the direction of the breakout, trying to get in at one extreme of the pattern, anticipating the breakout on the other side. We can use the measured move and we can also use the 1.6, 2.6 and 3.6 times our risk.
So, entering near the opposite side of the anticipated breakout gauged on the current pattern. And also, really, what we’ve covered in all the videos so far. Stopped just outside the entry and outside the potential pattern. Target is based on the measured distance, height of the pattern or 1.6, 2.6 and 3.6 times risk.
If the breakout doesn’t happen, we can just click out of the trade, get out and wait for another entry or the breakout. 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 loss. Only trade with capital you can afford to lose. Test out strategies before using them, especially this one. This one is going to take some practice. You’re going to have to go through probably the other videos again to get a good idea of reading the price action, so you can determine which direction the breakout is likely to be.
Until next time, happy trading.