FX Cowboy Breakout and Retracement Journal

I'm beginning this journal in an attempt to improve my trading. I'll be documenting my efforts to develop an "edge" -- a single, consistently profitable setup -- and to establish a trading plan based on that setup.

This journal is actually the continuation of a journal I started almost a year and a half ago, in DBPhoenix's "Mapping the Territory" member board. I haven't posted much to that journal over the last six months, so this journal is also an opportunity for me to start afresh, and to complete a task (which I regard as just a single step in a larger journey) that I have left unfinished.

As before, the objective is a written trading plan based on a breakout (BO) and retracement (RET) strategy. I believe that developing this plan will help me to overcome one of my main problems as a trader -- taking impulsive trades -- while making my trading more consistently profitable by providing researched, probability-based justifications for my trading decisions and minimizing the impact of emotions on my trading behavior.

I trade by price (and watch volume as a sort of punctuation for what I'm reading from price), but use no other indicators. The market I trade is the Euro/USD spot market. I get my volume information from the GLOBEX Euro futures market, which I monitor concurrently.

DBPhoenix has been kind enough to provide commentary from time to time in my previous journal, and I certainly hope he will continue to do so in this journal. Comments from others -- especially trader interested in and/or experienced with breakout and retracement setups, and those knowledgeable about trading forex -- are also most welcome.

A couple of quick notes on methodology:

First, currency markets run 24 hours a day, 5 and a half days per week. For the purposes of this setup, the Previous Day High (PDH) and Previous Day Low (PDL) will be the highs and lows occurring during the period from one midnight to the next in US EST/EDT, but again only if those levels were significant enough to turn prices. These levels usually coincide with the levels that would be used if the GLOBEX standard were adopted (which begins the new day at 5:00 CST).

Second, I use the GLOBEX EUR futures contract (currently 6EM6) for my charting AND SETUP SIGNALS, but I'm entering trades in my Spot Forex account. Aside from the fact that the price levels are different, the two actually track pretty well. When there are differences (and this happens frequently, although the differences are usually small), trading in this manner can be imprecise, leading to stops taken out (or targets barely missed) in the market you're trading while the market you use for signals is performing as hoped. It can be frustrating indeed, but usually is only an annoyance. For my current purposes, it will suffice.

hi, fx

I trade 3 bar retracements (including after breakouts) on uk shares so will be interested to compare notes.
Unfortunately, though, I know nothing about forex 'nor how what I do would fare in those markets.

good trading

jon

FX_Cowboy said:

. . . this journal is also an opportunity for me to start afresh, and to complete a task (which I regard as just a single step in a larger journey) that I have left unfinished.

Click to expand...

You may or may not be pleased to learn that it's never finished

dbphoenix said:

You may or may not be pleased to learn that it's never finished

Click to expand...

I think I've read enough of your stuff to interpret this as meaning that one can always improve on one's current plan, or even that a good plan will need periodic adjustments. If I thought I couldn't put together a single, consistently profitable setup -- -- well, I think I'd just go back to the cows.

FX_Cowboy said:

I think I've read enough of your stuff to interpret this as meaning that one can always improve on one's current plan, or even that a good plan will need periodic adjustments . . .

Click to expand...

Correct. I, for example, with all the waffling around, have had to resort to scalping.

Basic Strategy

As I mentioned, I'm working on a breakout and retracement strategy. But breakout from what? I'll be concentrating on:
-- price breakouts through important Support and Resistance (S/R) levels ("important" to me means primarily daily highs and lows, especially those from the previous day)
-- breakouts from well defined ranges (these often develop after a trend day in the afternoon, and extend into the night), as well as certain specific price formations within ranges.

Especially because I am working on eliminating impulse trades, I'll only take trades that I have defined beforehand -- so the specific price formations will have to be visible far enough in advance for me to plan my trades. I'll be using primarily daily, 3 hour and hourly charts to identify S/R levels and other price formations that I want to trade, and will watch a 5 minute and 55-tick chart for actual entries. A key part of my planning process will be studying and marking up charts so that I know what to watch for in real time.

Entry Tactics

Once price has broken through S/R, I'll usually be entering a trade based on a modified 1-2-3 entry.

Good thread

FX_Cowboy said:

Once price has broken through S/R, I'll usually be entering a trade based on a modified 1-2-3 entry.

Click to expand...

Interesting in that this is another breakout entry method (I look at Forex)that waits for a retrace before initiating a trade.
Thanks for the useful charts.

I think I may have already gotten a little ahead of myself in terms of specifying the 1-2-3 entry, which is essentially refining tactics that haven't been defined in the first place.

What I plan to do first is define a very simple BO/RET setup, along with the most easy-to-identify entry rules I can think of. At this stage, I'm not creating an entire trading plan, merely taking a first stab at creating rules for identifying a setup and entering a trade. I'll then go back and research this entry, and determine how well it performs on the basis of success/failure criteria that I will specify beforehand. Keeping it simple is the key now. I just want to know whether I *might* have something to work with here.

For the first pass, I will only be looking at BO's from previous day highs and lows (PDH's and PDL's). In this round of testing, any time price breaks through a PDH or PDL, a potential trade is triggered. However, I will only enter a trade on a retracement. (Please note that this is all back testing on historical charts; it's WAY too soon to be risking real money on this developing setup.)

There are many different kinds of retracements, but for the sake of keeping things simple, I'm going to specify rules that I hope will make entries very easy to identify. All of the following is based on price action on a 5-minute chart. Any time after the BO (so, after the candle that breaks through S/R), if a candle high is lower than the previous candle high, that will count as a retracement. (This is on a BO upwards through resistance; reverse the logic for a BO down through support.) After a retracement, an entry will be made the next time price exceeds the high of a previous candle.

There is also (for now), one qualification: If during the retracement, price falls below the S/R level it just broke through, it may only leave a candle tail behind -- none of the candle bodies during the RET may be below/above the PDH/PDL, or the entry is not valid. (Note: This rule is somewhat arbitrary, in the sense that price action is a continuous flow, and candles are arbitrarily time slices of this action. Nevertheless, I'm after simplicity here, and I'm using this rule to ensure that if price falls below the PDH/PDL, it's only for a short time. Additionally, this rule will make entries easier to identify using historical charts.)

I will judge whether an entry succeeds or fails according to the following rule:
-- If, after entry, price continues in the direction of the BO a distance equal to the distance from the low of the retracement to the entry point plus one pip, the entry is a success.
-- EDIT: If price falls below the low point of the RET minus one pip after entry, the entry fails.

EDIT: Also, whether or not an entry is a success or a failure, if price falls below the level of the low point of the RET minus one pip, additional entries must be made if they meet all other criteria.

All of this will become clearer once I start posting charts. At least for the first ones, I'll mark everything as clearly as I can so that anyone interested can follow along.

There are many, many refinements and variations I could be adding, even at this early stage. As I go through this first round of testing, I'll keep track of whatever changes seem justified based on the data I collect through the testing process. If I've left out something that seems like it just MUST be included right away, then I'll either add it in, or if necessary start testing from the beginning.

Let the backtesting begin!

The charts attached to this post demonstrate the process I'm going through in order to determine whether this setup has any merit.

On a couple of charts, there are multiple entries, due to price repeatedly falling below the PDH and then rising above it. One might reasonably question whether the second and following "breakouts" through a single level can actually be defined as breakouts at all, but for the moment I'm just going to go with it. My (relatively little) experience with this particular market has led me to believe that price sometimes does waffle around important levels before finally taking off.

Also, in the last chart, the first two entries failed -- primarily because the distance between the RET low and the entry point was so great. I'm going to make a note to take a look at success/failure criteria for entries where this is the case. In other words, at least with one entry, price moved a full 15 pips in the desired direction, but one pip short of the "target". I think this warrants a closer look and perhaps a special rule.

I'm going to use this post as a place to put issues that I want to resolve at a later time. As these issues arise, I'll edit this post, adding whatever it is I need to look at. If/when I make a decision on the issue, I'll mark it as resolved (e.g. "Resolved, post #24"), so that there will be some way of seeing the continuity of the decision-making process later.
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1) (Posting # 11) Entries where the distance is relatively large (say, over 10 pips) between the RET low and the entry point create a situation where the initial "success target" is also larger than average, and *may* be more prone to an entry failure. There are several way to deal with this: keep the rules the same, don't take these trades, set some lower "success target" (with a correspondingly closer "failure point"), or change the entry criteria. I'll need more information to decide this issue.

2) (Multiple posts) I'm noticing that when the bar following the entry bar moves in the "wrong" direction, it usually precedes an entry failure. I'll want to review this once I have more samples to see if this would be a good early exit.

FX_Cowboy said:

I'm beginning this journal in an attempt to improve my trading. I'll be documenting my efforts to develop an "edge" -- a single, consistently profitable setup -- and to establish a trading plan based on that setup.

This journal is actually the continuation of a journal I started almost a year and a half ago, in DBPhoenix's "Mapping the Territory" member board. I haven't posted much to that journal over the last six months, so this journal is also an opportunity for me to start afresh, and to complete a task (which I regard as just a single step in a larger journey) that I have left unfinished.

As before, the objective is a written trading plan based on a breakout (BO) and retracement (RET) strategy. I believe that developing this plan will help me to overcome one of my main problems as a trader -- taking impulsive trades -- while making my trading more consistently profitable by providing researched, probability-based justifications for my trading decisions and minimizing the impact of emotions on my trading behavior.

I trade by price (and watch volume as a sort of punctuation for what I'm reading from price), but use no other indicators. The market I trade is the Euro/USD spot market. I get my volume information from the GLOBEX Euro futures market, which I monitor concurrently.

DBPhoenix has been kind enough to provide commentary from time to time in my previous journal, and I certainly hope he will continue to do so in this journal. Comments from others -- especially trader interested in and/or experienced with breakout and retracement setups, and those knowledgeable about trading forex -- are also most welcome.

Click to expand...

Hi FX Cowboy..I trade Spot Cable and NEVER look at "volume" given that I view it as meaningless stat in FX. Why do attach importance to it?

zuke said:

Hi FX Cowboy..I trade Spot Cable and NEVER look at "volume" given that I view it as meaningless stat in FX. Why do attach importance to it?

Click to expand...

As I mentioned, I watch the Euro Futures market as well as the spot market. In the futures market, I do believe that the volume of transactions tends to rise and fall in the same way it does in many other markets, providing clues concerning the strenth of a directional move, for example, or punctuating a buying or selling climax.

However, you'll notice that in the setup I'm defining, I've made no mention of volume whatsoever. As such, the importance of volume (or lack thereof) isn't material to the process I'm engaged in. So, for the purposes of this setup, it seems we're in agreement.

FX_Cowboy said:

I'm going to use this post as a place to put issues that I want to resolve at a later time. As these issues arise, I'll edit this post, adding whatever it is I need to look at. If/when I make a decision on the issue, I'll mark it as resolved (e.g. "Resolved, post #24"), so that there will be some way of seeing the continuity of the decision-making process later.
-------------------------------------------------------------------------------------------------------------------------------

1) (Posting # 11) Entries where the distance is relatively large (say, over 10 pips) between the RET low and the entry point create a situation where the initial "success target" is also larger than average, and *may* be more prone to an entry failure. There are several way to deal with this: keep the rules the same, don't take these trades, set some lower "success target" (with a correspondingly closer "failure point"), or change the entry criteria. I'll need more information to decide this issue.

Click to expand...

fx

fwiw I, too, use 1:1 for first success target. When the last retracement bar is unusually long I drop to a lower level to see how that bar was made up and whether there is a sensible, earlier failure stop level than the low/high of the bar.

good trading

jon

barjon said:

fx

fwiw I, too, use 1:1 for first success target. When the last retracement bar is unusually long I drop to a lower level to see how that bar was made up and whether there is a sensible, earlier failure stop level than the low/high of the bar.

good trading

jon

Click to expand...

Thanks for your comment. I think that's where I'm headed with all this too. At this stage, though, I'm really trying to get a more general sense of the success/failure ratio for the basic idea of BO/RET's through the PDH/PDL. I'm thinking that if that ratio looks promising, I'll start refining some of the tactics involved, and moving to a shorter bar interval to fine tune my entries is one place I'll certainly look.

barjon said:

When the last retracement bar is unusually long I drop to a lower level to see how that bar was made up and whether there is a sensible, earlier failure stop level than the low/high of the bar.

Click to expand...

Also, if you'd like to share this, I'd be interested to know what to you constitutes a sensible, earlier failure stop.

More charts...

FX_Cowboy said:

Also, if you'd like to share this, I'd be interested to know what to you constitutes a sensible, earlier failure stop.

Click to expand...

fx

tested support/resistance levels

I can't show you an example since I don't have historical intraday charts (I'm working from eod, remember). An obvious example would be where the price made an early dash to make the low of the day, then moved up from there and consistently found support at a higher level during the day. I'd set my stop just below that level and not the low of the day.

Hope that's clear without a picture

jon

FX_Cowboy said:

As I mentioned, I watch the Euro Futures market as well as the spot market. In the futures market, I do believe that the volume of transactions tends to rise and fall in the same way it does in many other markets, providing clues concerning the strenth of a directional move, for example, or punctuating a buying or selling climax.

However, you'll notice that in the setup I'm defining, I've made no mention of volume whatsoever. As such, the importance of volume (or lack thereof) isn't material to the process I'm engaged in. So, for the purposes of this setup, it seems we're in agreement.

Click to expand...

Cool! Thanks for the response mate.