ATR Channel Breakout Strategy

Introduction

This strategy is a breakout strategy which is meant to be carried out on a 4 hour chart. The strategy can be implemented on all currency pairs, and especially on those pairs which have a tendency to trend very well.

Indicators

The indicators for this strategy will be drawn from a combination of native and customized indicators. The indicators are listed below with their settings:

ATR Channel Setting

  1. Periods: 20
  2. MA: 50
  3. Multifactor 1: 2
  4. Multifactor 2: 2
  5. Multifactor 3: 0

ADX histogram setting

  1. ADX VMA (10.0 period)
  2. ADX VMA (4, price
  3. ADX VMA trend: True

The indicators have been modified from the native Average True Range indicator and the Average Directional Movement indicator to give a trading system which is both direction based and range-based.

The Strategy

Here is the strategy. The Average True Range indicator ordinarily measures how far a currency’s price action will go at any given point in time. The modification of this indicator traces out several channels which represent the expected price ranges for the currency pair. However, there will be periods when the price breaks free from all channel ranges and shoots to the upside or downside. The signal for this price breakout comes from the bars of the ADX VMA histogram, which impart a colour change to the expected price breakout, or no colour at all if the price is to remain within the channels of the ATR channel indicator.

1) Long Trade

The Long trade setup occurs when the ADXVMA bars are green and at the same time, the previous bar has closed above the entry threshold that is located above the top of the channel. In other words, when the price action has closed above the channel thresholds set by the ATR indicator, a green coloured ADXVMA histogram will give the necessary confirmation that price will continue upwards in the breakout direction.

ATR1

In this snapshot, we see that the price action has closed above the topmost channel line, which is the price threshold for this trade that has been set by the ATR channel indicator. We see the lines of the ADXVMA histogram as being green in colour, which suggests that the price action will most likely continue to head northwards. The trade is opened at the break of the upper channel line of the ATR channel indicator

Stop Loss

The stop loss is set at around 60 pips. Remember that the trade is setup with a 4-hour chart, therefore the stop loss should have enough room to breathe.

Take Profit

The Take Profit is set to twice the stop loss, which is 120 pips. However, it is advisable to start to trail the price action once 70-80 pips have been achieved. You can also decide to use a colour change of the ADXVMA indicator as he benchmark for trade exit

2) Short Trade
The Short trade setup is the reverse play. This occurs when:

  1. The price action closes below the lowest channel, which is the price threshold set by the ATR indicator.
  2. At the same time, the ADXVMA histogram turns red, which is an indication that price looks set to continue downwards following the break of the lower price threshold.

The short trade is entered on the asset on the open price of the next candle. We demonstrate this trade setup in the snapshot below:

ATR2

In this snapshot taken from the 4hour chart of the EURUSD, we see the price action moving below the lowest channel set by the ATR channel indicator, and the ADXVMA indicator showing a red colour which decides the trade for us in a southward direction.

Stop Loss
The stop loss is set to around 60 pips.

Take Profit

The Take Profit level is set to twice the stop loss level. When the price has hit about 80+ pips, it can be trailed with a trailing stop to ensure that the profits already made are retained while chasing the 120 pip mark. You can also decide to use a colour change of the ADXVMA indicator as he benchmark for trade exit.

Conclusion

This strategy performs very well in a trending market, and less so in a range-bound market. Therefore, trades made on currency pairs that tend to trend, or on assets listed on certain forex platforms such as the stock indices or gold, will do very well with this strategy.

This is simply another way to trade the breakout of price action, but this time using customized indicators. If you need these indicators, all you need to do is to download them here.

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