3# Inside Day Breakout Trading System

Submit by Janustrader 03/04/2011

(Strategy by Kathy Lien pages 126-128Day Trading and Swing Trading)

This strategy works with all currencies pairs, but has less frequent instances of false breakouts

in the tighter range pairs such as the EUR/GBP, USD/CAD, EUR/CHF, EUR/CAD, and AUD/CAD.

Strategy Rules:

Long

1. Identify a currency pair where the daily range has been contained within the prior day’s range for at least two days (we are looking for multiple inside days).

2. Buy 10 pips above the high of the previous inside day.

3. Place a stop and reverse order for two lots at least 10 pips below the low of the nearest inside day.

4. Take profit when prices reach double the amount risked or begin to trail the stop at that level.

Protect against false breakouts: If the stop and reverse order is triggered, place a stop at least 10 pips above the high of the nearest inside day and protect any profits larger than what you risked with a trailing stop.

Short

1. Identify a currency pair where the daily range has been contained within the prior day’s range for at least two days (we are looking for multiple inside days).

2. Sell 10 pips below the low of the previous inside day.

3. Place a stop and reverse order for two lots at least 10 pips above the high of the nearest inside day.

4. Take profit when prices reach double the amount risked or begin to trail the stop at that level. Protect against false breakouts: If the stop and reverse order is triggered, place a stop at least 10 pips below the low of the nearest inside day and protect any profits larger than what you risked with a trailing stop.

Examples

Let us take a look at a few examples. is a daily chart of the euro

against the British pound, or the EUR/GBP. The two inside days are identified on the chart and it is clear visually that both of those days’ ranges, including the highs and lows, are contained within the previous day’s range.

In accordance with our rules, we place an order to go long 10 pips above the high of the previous inside day at 0.6634 and an order to sell 10 pips below the low of the previous inside day at 0.6579. Our long order gets triggered two bars after the most recent inside day. We then proceed to place a stop and reverse order 10 pips below the low of the most recent inside day at 0.6579. So basically, we went long at 0.6634 with a stop at 0.6579, which means that we are risking 45 pips. When prices reach our target level of double the amount risked (90 pips) or 0.6724, we have two choices—either close out the entire trade or begin trailing the stop. More conservative traders should probably square positions at this point, while more aggressive traders could look for more profit potential. We choose to close out the trade for a 90-pip profit, but those who stayed in and weathered a bit of volatility could have taken advantage of another 100 pips of profits three weeks later.

This is another example of inside day trading, this time using the

daily chart of the New Zealand dollar against the U.S. dollar (NZD/USD).

The difference between this example and the previous one is that our stop and reverse order actually gets triggered, indicating that the first move was a false breakout. The two inside day breakout are labeled on the chart. In accordance with our rules, after identifying the inside days, we place an order to buy on the break of the high of the previous inside day and an order to sell on the break of the low of the previous inside day.

The high on the first or previous inside day is 0.6628. We place an order to go long at 0.6638 or to go short at 0.6618. Our long order gets triggered on the first day of the break at 0.6638 and we place a stop and reverse order 10 pips below the low of the most recent inside day (or the daily candle before the breakout), which is 0.6560. However, instead of continuing the breakout, the pair reverses and we close our first position at 0.6560 with a 78-pip loss. We then enter into a new short position with the reverse order at 0.6560. The new stop is then 10 pips above the high of the most recent inside day at 0.6619. When NZD/USD moves by double the initial amount risked, conservative traders can take profit on the entire position while aggressive traders can trail the stop using various methods, which may be dependent on how wide the trading range is. In this example, since the daily trading range is fairly wide, we choose to close the position once the price reaches our limit of 0.6404 for a profit of 156 pips and a total profit on the entire trade of 78 pips.

The final example uses technicals to help determine a directional bias of the inside day breakout. This is a daily chart of EUR/CAD. The inside days are once again identified directly on the chart. The presence of higher lows suggests that the breakout could very well be to the upside.

Adding in the MACD histogram to the bottom of the chart, we see that the histogram is also in positive territory right when the inside days are forming. As such, we choose to opt for an upside breakout trade based on technical indicators. In accordance with the rules, we go long 10 pips above the high of the previous inside day at 1.6008. Our short trade gets triggered first, but then our stop and reverse order kicks in. Our long trade is then triggered and we place our new stop order 10 pips below the low of the most recent inside day at 1.5905. When prices move by double the amount that we risked to 1.6208, we exit the entire position for a 200-pip profit.

With the inside day breakout strategy, the risk is generally pretty high if done on daily charts, but the profit potentials following the breakout are usually fairly large as well. Generally these breakout trades are precursors to big trends, and using trailing stops would allow traders to participate in the trend move while also banking some profits.