Casey Stubbs, Winners Edge Trading
The Break and Go strategy is a simple to understand, simple to execute, and very profitable strategy for trading the Forex market. Using the custom Break and Go tools, the strategy is easy to use and will take your trading to a whole new level. The Break and Go strategy will work on any instrument your broker provides and will work on any time frame up to Daily.
Implementing the Break and Go Strategy consists of observing the trend and waiting for a break of a key level in the direction of the trend. Setting risk is easy since you already know roughly how many pips your stop loss will be, so you can size your trade in advance of the trigger and maintain your risk parameters (you do have risk parameters in your trading plan, right?)
Determining the Trend
A trend is simple when the market is making higher highs (uptrend) or lower lows (downtrend.) Determining the trend is a tricky activity. Because the market doesn’t just go up and up or down and down but rather breathes in and out – goes up and down and up and down; determining the trend is not a simple task. The trend can even be opposite on different time frames. That’s the reason you can’t look at someone’s trade and say they are going “the wrong direction”. The market moves up and down and other people might be taking a trade based on a different time frame’s trend direction. Or they might just be a “counter-trend trader”, someone that takes advantage of the short bounces against the identified trend, but that’s a story for another report.
When you trade with an established trend, you increase your trade’s probability of being in the same direction as the market will continue to go. Again, that’s not to say that the market will not “retrace” or go counter to your identified trend for a short while. It’s also not to say that the market will not just completely turn around and go back the other way, in other words break your identified trend direction.
There are many ways to establish the trend direction. You can draw trend lines and trend channels to identify trend movements. A trend line is drawn that approximates the tops of the upswings in a downtrend or the bottoms of the downswings in an uptrend. If that sounds a little confusing, look at the charts below:
Drawing trend lines is a time consuming, tedious business and requires quite a bit of practice. The market never goes to exactly the right point. Then, which trend line is right? Well, strictly speaking, they’re all right. Any trend line that can be drawn will have traders expecting reversals. That’s one of the reasons why we talk about levels and zones rather than specific prices when we talk about lines.
We’ve mentioned the fact that trends can be different on different time frames. For example: the first chart above is an Hourly GBP/USD chart and shows a downtrend. Well, here’s an uptrend on the Daily GBP/USD chart. You can see the Hourly downtrend (Blue Trendline) within the context of this Daily Uptrend (Red Trendline.)
Another good way to determine the trend is to put a moving average on your chart and observe whether the moving average is going up or down. Again, that sounds simple, but in practice it can be more difficult. There are a couple of parameters to consider when applying a moving average. One is the type of moving average. For the purposes of this report, we’ll discuss two of them. The first is the type of moving average. The second is the number of periods you will use to calculate the moving average. The Simple Moving Average (SMA) is calculated using the simple average of x number of candle close prices. In other words, a 10 period moving average will simply take the last 10 closing prices, add them together and divide by 10 to determine the current moving average. Then a line will be drawn to show these averages on the chart.
You’ll notice on this chart that the 10 period moving average has a lot of ups and downs in it. Sort of like the price action. That makes it a bit difficult to use it to determine the trend. That problem can be solved by using a longer period, say a 100 period moving average:
As you see, the moving average has smoothed out quite a bit, solving one problem, but exchanging it for a different problem. The 100 period moving average responds slowly to market turns. One solution to this problem is the second type of moving average we will discuss, the Exponential Moving Average or EMA. The EMA takes the last x candle close prices and adds them together, weighting them exponentially so the most recent price candle outweighs the next most recent candle and so on back to the first candle in the group, which has the least weight. The EMA responds much more quickly to market changes than the SMA:
As you can see here, the EMA is much more responsive to the market, but consequently you end up with more up and down movements that you will have to decipher to understand the market’s trend direction.
There are other common indicators that you can use to determine the market trends, but as you can see, the variables are endless and quite time consuming to consider.
We at Winner’s Edge Trading have spent a lot of time attempting to solve all the problems of determining the trend direction. We don’t claim to have the “Holy Grail” trend tool, but our Break and Go Trend Tool does a good job of cutting through the issues of trends. We’ll discuss in just a bit. First we’ll talk about the other element of the Break and Go Strategy, the key level break.
Identifying Key Market Levels
One tool professional traders use to identify key market levels is the Pivot Points. Pivot Points are a simple calculation of price and price movement that identifies levels that professional traders expect market turns. There’s nothing magical about the calculation or the levels, it’s just a self-fulfilling prophecy. When traders expect a market turn, then they set up orders to take advantage of the market turn – thereby creating the market turn. If the “big money” (or smart money – the professionals) anticipate a turn at a certain price, they will have stop losses and targets at that level that will cause the market to stall, reverse or retrace due to the sheer size of the positions they have on (or put on) at those levels.
Another way to determine key market levels is to identify prominent points where the market actually turned in the past (particularly on the daily and weekly charts.) Those levels may or may not hold, but what is highly probable is the market will bounce at that level. As we mentioned above, the market rarely goes straight up or straight down, what it does is it breathes up and down, up and down. If you study a chart, you will see this breathing and you will see how the market respects certain levels when it breathes. You will also note that when we say “levels” we’re not referring to a specific price, but a range of prices. When price action “tests” one of these levels, it more often than not, pushes past the level by a few pips. The number of pips it pushes past the level will usually depend on the speed and momentum of the market at the time it tests the level. Below you will see a weekly chart of the GBP/USD showing the market back to mid-2002. I haven’t marked all the key levels on this chart (because there are many), but I’ve marked a few that show how the weekly chart itself has respected the levels. If you were to drill down to the Daily, 4 Hour and 1 Hour charts, you would find that there is much stalling and reversing at all of the weekly levels. I also marked the all-time high and low since 2002 in red. If and when the market hits these levels, you will see lots of testing and reversing near these levels. It’s very important to know where these prominent weekly and daily levels are even if you’re trading hourly charts. You will note often the market will break a level and then go back and test that level before moving on.
With the Break and Go Strategy, you look for breaks of these key levels in the identified direction of the trend and enter in that direction, placing your stop losses and take profits (targets) at the key levels above and below the entry level.
As we will be discussing below, using the Break and Go Key Levels Tool in combination with the above key levels is an example of the more advanced techniques you can use with the Break and Go Trend Tool that will have a dramatic effect on your trading profitability.
Sizing Your Trade
The most important thing you want to do as a trader is to protect your trading account. No trade is 100% sure, so you never want to “bet the farm”. If you blow out your trading account by not controlling your risk, that will be an end to your trading career. Trading is a marathon, not a sprint. So you ALWAYS must manage your risk. You can do that in any of several ways. Typically we recommend that you only risk a certain percentage (1%) of your trading equity on any single trade. You can use Winner’s Edge Trading’s free Risk Calculator (http://tools.winnersedgetrading.com/riskcalculator/) to calculate your risk as a percentage of your account.
Let’s take a minute to discuss risk management. As we said above, your most important asset as a trader is your trading account. If you lose your trading account, you can’t trade any more. Even if you’re just overflowing with cash and can replenish your trading account at will, you don’t want to be stupid about it. Trading is a business and should be run like a business. If your business is continually losing, do you keep pumping in good money after bad to keep operating because it’s “fun”. Of course not. Trading is just the same, manage your risk so you don’t blow your most important asset. When risk management is applied to a single trade it is more appropriately called trade management – except that trade management includes decisions about where to take profits as well.
Individual Trade Risk Management
There are several ways to look at individual trade risk management. The first method is to always trade the same lot size, but stop the trade when it reaches your maximum dollar (or in whatever currency you maintain your account) loss amount. Some platforms will allow you to do that automatically. If your platform can’t handle that automatically, you must be very careful to keep your emotions in check. No one likes to take a loss and sometimes we can “justify” letting it run a little further because it “looks like it’s about to turn.” Taking losses on positions is part of the job of trading, just be sure to keep them within your trading parameters. You have to be like a drill sergeant about cutting the losses. You can’t take any guff from your position. You may even end up taking your loss and having the market immediately turn around and hit your target (like the market was just waiting for you to “cry uncle”.) Don’t let that “teach” you to hold onto a bad position longer than you should.
The problem with using the same lot size and stopping at your maximum dollar loss is that sometimes your maximum dollar loss will be right at a support or resistance level that actually will hold and reverse and end up hitting your target. That’s painful.
The second way to look at individual trade risk management is to always use a maximum pip loss on your positions and be sure to stop the trade at that point. Then size your trade so that point will result in your maximum per-trade dollar loss. This makes a little more sense, since you can tailor your stop loss to the specific instrument you’re trading based upon typical moves in that instrument. That’s very similar to the first scenario, but all platforms will allow you to place a stop loss based on a certain price (easily calculated from your maximum pip loss), so you can take emotions out of the decision. Well, you can still move your stop loss at the last moment, but it’s easier to close your eyes and keep your hands off and let it stop out than it is to have to actually click the “Close Trade” button at the appropriate time. Again, while this method actually takes the price action into account, you can still end up with a stop placement ahead of a key level. Which could cause a “the trade hit my stop and then turned and hit my target” situation.
The traders at Winner’s Edge Trading prefer a third method of individual trade risk management. We start by analyzing a chart of the instrument you’re trading and identify high probability support and resistance levels – what we call key levels. We put our stop loss beyond the appropriate key level so the market has to do the work of breaking that level before our stop is taken out. That will reduce the number of “stopped out, but hit my target anyway” situations. After we identify the location of our stop loss, we calculate the size of the position we are trading so that, if the market hits the stop loss, the loss is in keeping with our pre-identified maximum risk parameters. As mentioned, Winner’s Edge Trading has a handy Risk Calculator for making this calculation simple (http://tools.winnersedgetrading.com/riskcalculator/.)
Knowing how much you are willing to lose on a single trade is something that needs to be decided in advance of taking a position. If you wait until your trade is under way, your emotions will be too invested in the position to make a rational decision. In fact, you should be setting out a group of rules as to how and what you will be trading. You can get more details about writing a trading plan here: http://www.winnersedgetrading.com/5-steps-to-a-trading-plan-thats-guaranteed-to-bring-profit/
One more comment to make about individual trade risk management. If, during the course of a trade, your hands get sweaty, your mouth gets dry and all you can do is watch in fear as the trade breathes, then you’re position is too large for your emotions. Size that position WAY down until you get used to the ups and downs of the market. You won’t live long if you have too much stress every time you open a position. You won’t successfully trade very long either because you will find it tiring. Successful trading is actually sort of boring. You identify a high probability trade, you set your parameters according to your rules, you open the trade, it hits the target or loss and you move on to the next one. Too much celebration or self-flagellation due to the results of a trade is not a good thing.
The Break and Go Strategy is simple to execute, but using the tools we have designed specifically for the strategy will make your trading significantly easier. The tools are not necessary to use the strategy, but they are meant to simplify it and give you back your time. Here’s a brief synopsis of the Break and Go Strategy Tool Kit.
Component 1: Break and Go Trend Tool
The Break and Go tools consist of three indicators that you can use to find Break and Go trades. The first of these tools is the Trend tool.
The Trend tool determines the trend with a proprietary calculation that includes price action, candle closes, market structure and moving averages. The Trend Tool automatically defines the trend on eight different time frames (1m, 5m, 15m, 30m, 1hr, 4hr, Daily and Weekly.) Because the Trend Tool shows the trends on so many time frames, you can use the Trend Tool for many advanced trading techniques that look at multiple time frames.
A green up arrow indicates a long trend suggesting that a buy trade is in order. Conversely, a red down arrow indicates a short trend suggesting a sell trade is in order. A gray arrow pointing right indicates a sideways trend on that particular time frame and it would be advisable to stand aside until the market decides what direction it’s going.
You will want to consult the Trend Tool when you are setting up your trade. If you are setting it up on a one hour chart, you should be sure the 1HR trend agrees with your trade setup.
Break and Go Trend Tool
When you get agreement on many time frames, you know that you have a powerful trend. If the trend on the shorter time frames start to change, you might be experiencing a market pullback or a turn in the market. If you have different directions throughout the Trend Tool, you may be experiencing a choppy market and will again want to stand aside until the market decides its direction.
Component 2: Break and Go Key Levels Tool
The next component of the Break and Go Tools is the Key Levels Tool. The Break and Go strategy uses key levels to determine trade opportunities. The Key Levels Tool shows the levels to which you can expect the market to react.
The Key Levels Tool uses Weekly and Monthly pivot points to identify key market levels. As you can see by the way the market hits the levels and rebounds, the market respects the Weekly and Monthly pivot points. When the levels are broken, you can see that the market “accelerates” away from them. A break of one of these key levels is very important and requires quite a bit of market momentum – which typically carries the price to (or through) the next key level – the very concept behind the Break and Go Strategy.
Pivots are important on all time frames, but the primary Support and Resistance pivots on the Weekly and Monthly time frames are respected much more than the pivots on shorter time frames.
Bonus Component 3: Market Momentum Tool
Lastly, there is a bonus component. The Market Momentum Tool is not necessary to trade the Break and Go Strategy, but it can help give the more advanced trader additional insight into current market conditions.
The Momentum Tool will show you the current market speed (Slow, Average, or Fast) which represents how fast price is moving in the market. A fast market is tricky to trade if you are a new trader. Things move fast and you can get into deep trouble quickly if you are not prepared.
In addition, when there is a lot of momentum in the market, the Market Momentum Tool will display an arrow in the direction of current market momentum. Market Momentum is a good thing to know, but remember that momentum only lasts for a short time. When you have Market Momentum, you may also have an exhausted market that needs some retracement to relieve pressure. As you know (or will discover) the market doesn’t just go up or down forever, but moves in steps with reverse moves as traders take profits from larger moves. The market breathes in and out. So when you see market momentum, watch for some reverse movement before taking your position. Many people get excited about momentum and end up buying at the top or selling at the bottom.
Using the Break and Go Tools to Set Up Trades
After you set up the Break and Go Tools on your platform, determine the pair(s) and time frame(s) you want to trade, and apply the Break and Go templates to your charts, you’re ready to look for some trades.
The Break and Go Strategy in its simplest form consists of the following rules:
1. Confirm the trend based on the time frame you’re trading using the Trend Tool.
2. Look for a broken level in the same direction as the trend using the Key Levels Tool.
3. Use the key levels to set the stop loss and take profit for your trade.
4. Calculate your position size to manage your risk.
5. Enter the position.
For example, here’s a GBP/USD hourly chart. You’ll notice the 1HR trend is down (as are many of the time frame trend indications), so we will be looking for an opportunity to enter a short trade.
We will now watch the price for a break of the key level indicated by the Monthly (Green) horizontal line just below the current price. When the break occurs, we’ll set the Stop Loss above the prior Weekly (Blue) line. Make sure to get above the key level so the market will have to do the work of breaking that level to stop the position out. We’ll then set the Take Profit above the next Monthly (Green) line so the market will not have to do the work of breaking that level to hit our Take Profit.
Using the Break and Go Momentum Tool
You can use the bonus Break and Go Momentum Tool to further enhance your trading.
Once the Break and Go Momentum Tool shows market momentum, the correct way to proceed is to wait for the price to carry through a key level, settle and then continue in the direction of the trend. Momentum can indicate the end of a trend and you want to wait for the market to settle with a retrace back to the prior broken key level and a bounce from that level before entering a position after a break with momentum.
How Do I Get the Break and Go Tools?
Are you ready to take your trading to a new level? As you can see the Break and Go Strategy is simple to use and can substantially enhance your profitability. You can find more information about the Break and Go Tools at https://info.winnersedgetrading.com/break-and-go-strategy