Box Trades or range breakout trade is one of the simplest and high probability trades out there, just the way I like it. It works with all markets.
What is needed to create a box:
- at least two lows at same level
- at least two highs at the same level
Once 2 lows and 2 highs are created (orange arrows), trade is “boxed”, with strategy being buying the break above the highs, or selling breakdown below the lows, with ultimate target of the pattern being full height of the box, and stop being right below the opposite end of original box, i.e if buying break out - stop below the low of original box, if selling the low - stop above the original box.
That is the definition of the trade, there are several problems that can occur:
- GOTCHA breakout - where new high or low is made by a few ticks and then sharply reverses.
- Box is just too big to fit risk tolerance of a trader, for instance on this particular Swiss Franc Trade of the box is about 80 pips or $1000 / contract.
To solve that problem, wait for a breakout one way or the other and then the backtest of the original box (green arrows) to enter.
Can call Mr Fibonacci for stop and target ideas, for instance multiple lot traders could make 23.6/38/50% of original box extension target, with same amount of stop within the original box (color coded rectangles on last chart)
Single lot traders after reaching what would be first target should move stop to break even or slightly into the money or below the low made on backtest.
Another good stop idea is below the recent significant low - red arrow on the chart, as breaking that low would technically break the uptrend.
On this particular box trade , there is no backtest of the original box, so even though trade was successful you would likely never get in. This would generally go down as a set up that didn’t fully develop, unless per your trading plan and your risk tolerance on boxes smaller than x amount of ticks you would simply buy the breakout and stop out on the opposite extreme of original box.
Box trades develop often, are simple, profitable and easy to spot, this was just from yesterday and also posted a twitter udpate about it as it was developing