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High Low Breakout Technique
This technique can be used for any market
that has a decent daily range. If you look at any chart,
what do you see?
You should see a succession of bars that are doing
one of three things.
- Going up
- Going down
- Going sideways
Unless today's bar turns out to be an inside day or
very rarely the high and low of today are exactly the
same as the high and low as yesterday, then we will
have a new high or low.
Think about it. Today's bar, in all probability will
make a higher high than yesterday's bar or a lower low
than yesterday's bar. This information is very powerful.
Look at the chart below:
|Now, the question is - how much of a higher
high or lower low will today achieve than yesterday?
In our next example, company XYZ had a range of 200
points (high minus the low) yesterday. Today the high
might be 50 points higher than yesterday's bar or 50
points lower than yesterday's bar. If we can find the
average daily distance between the high of yesterday's
bar to the high of today's bar and the average daily
distance between the low of yesterday's bar and the
low of today's bar, then we might have a trading opportunity.
|Make yourself a little excel sheet or grab
a pen and paper and start tracking the high and lows of
each day. Then deduct the high of today from yesterday's
high and the low of today from yesterday's low. After
you have a few day's worth of data you can get an average.
On the excel sheet, below the first five columns are the
date, open, high, low and close. "DR" is daily
range, "TH-YH" is today's high minus yesterday's
high and "YL-TL" is yesterday's low minus today's
low. In the "TH-YH" column, I only record an
entry if today's high is greater than yesterday's high
and in the "YL-TL" I only record an entry if
today's low is lower than yesterday's low. All pretty
|OK, as you can see, the example of the GBP/USD
(Pound/Dollar). The average breakout up was 54 pips and
the average breakout down was 60 pips. The next thing
to do is apply this knowledge to our trading.
On the 2nd September the high was 1.7972 and the low
was 1.7864. We are looking for a breakout of either
of these points. It doesn't matter which way. So on
the 3rd September you mark the previous day's high and
low and monitor what happens when it reaches these points.
|The way I trade this setup is to wait for
the market to test the low or high of the previous day
and then pullback. I don't enter on a break of the previous
day's high/low, I wait for a pullback of either a test
of the high/low or a break of the high/low.
As you can see from the chart, the market came down
and tested the low of 1.7864 and then pulled back. The
low that was made was just a few pips lower than the
previous day's low and formed a little support area.
That support area is the breakout point.
You can place an entry order a couple of pips below
the support area with a target of the average "YL-TL"
as a target, which in this case was 60 pips. The stop
is a bit more tricky. If the pullback is not too big
you can place your stop just above the pullback area
(resistance). If the distance is too great, then just
use Dollar stop.
You can even take this down to a 1 minute chart and
scalp the market with a very tight stop. There are loads
of ways to trade this setup. You could add some indicators
for confirmation. You could use the entry as setup for
a position trade. You could even concentrate on inside
day's where the breakout might have a much larger range.
However you decide to trade it, at least take note
of the previous day's high and low.
Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.
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