Entering The Trade
In this lesson you will learn how to trade the ten bar breakout strategy by first determining which direction you are going to trade and then where you can place your pending order and pending stop loss.
Note that although you can, in theory, use any time frame, we have tested this on a daily time frame.
Determine the direction
On your chart you should have a 89 period simple moving average. You will use this to determine the direction you will trade in.
If the last candle is above the moving average, you only take long trades and if the direction is below the moving average, you only take short trades.
The blue line, in the image below, is an 89 period moving average showing that the market is in a downtrend. The last candle on the chart is clearly below the moving average and so in this instance, you would only be looking for short trades. If the last candle had been above the moving average, then you would only look for long trades.
Determine the entry point
Count the last ten bars back
Once you have determined which direction you will trade, you can now start to look for a setup. Start by looking at the last candle on your chart and count back by ten candles. Find the high and the low within the last ten candles. In the image below, the last ten candles are shaded blue.
Find the lowest and highest point
Once you have counted the last ten candles back, you then need to find the highest and lowest point within the ten candles. As you can see in the image below, the lowest point is marked by 1 and the highest point is marked by 2.
These will be your entry points into the market and where you will also place your pending stop loss.
In a short trade, you would place your pending sell order – called a pending "sell stop order" – at the lowest point at 1 and the pending stop loss order would go at the high at 2.
In a long trade, you would place your pending buy order – called a pending buy stop order – at the highest point and the pending stop loss order at the lowest point.
In the image, the last candle is below the moving average and so you would not trade if a candle went above the high – you would only enter into a short trade if the candle went below the low marked at 1.
Entering a pending order
Now that you know how to work out your entry point, you can enter a pending order that will automatically enter you into a trade if a candle goes above or below the high/low of the last ten candlesticks.
In the case of a short trade, you would enter a sell stop order and in the case of a long trade, you would enter a buy stop order.
The following examples will clarify where you will put your pending orders in a long trade scenario and a short trade scenario.
In the chart below you can see that the last candle is above the moving average. The green shaded area shows the last ten candlesticks. You would enter a pending buy stop order at the high of the ten candlesticks at 1.
You would enter a pending stop loss at the lowest point of the ten candlesticks at 2.
- Pending buy stop order at the high of the last ten candles.
- Pending stop loss at the low of the last ten candles.
In the chart below, you can see that the last candle is below the moving average. The green shaded area shows the last ten candlesticks. You would enter a pending sell stop order at the low of the ten candles, shown at 1.
You would enter a pending stop loss order at the highest point of the ten candles at 2.
- Pending sell stop order at the low of the last ten candles.
- Pending stop loss order at the high of the last ten candles.
Note that in the chart above, the candle has crossed the moving average from above to below. While the current price is below the moving average, the candle is considered below the moving average.
Now that you have set your pending order, you need to manage it while you wait for the price to break above the high or the low of the last ten candles, see next lesson.