Magic Breakout Forex strategy - How that Works

Author: Consultant Finmaxfx

What is Breakout Trading System

Trends have a different nature. Some are temporary, some are sustainable and continuous with several stages of healthy retracements and corrections. Those bounces are perfect to enter the market if you missed the initial trend is movement. Sometimes it happens that traders take profits too early and start looking for another chance to re-enter the same trend. The best option is to buy-dips in this case but it is dangerous as the market can reverse suddenly and go back to the initial level, eliminating all of the gains/losses from the recent price action. The biggest question is how to determine whether this bounce against the trends is a retracement and the same direction will be dominant for the nearest future or is it the first sign of a reversal and price would come back? Here is why the Magic Breakout System needed.

Breakout trading is an attempt to enter the market when the price moves outside a defined price range (support or resistance). However, a genuine breakout needs to be accompanied by increased volume.

Advantages of Magic breakout System

One of the advantages of the system is that it allows entering the market before the crowd, having a leading nature of technical indicator used here. Experienced traders know how important that is just because the price could change the sentiment in a blink of an eye, sometimes quotes spike up or down for hundreds of pips in seconds and even human reaction is not able to get in time with the deal opening. As a result, the new position appears to be too late for this particular trend and bounces are possible instead of further movement. This is why it is extremely important to be one step before the crowd in the trading decision.

If you like this strategy, you might also be interested in this Williams Alligator

Another benefit is related to the system is simplicity. It has only three indicators (actually two but the second one comes in different options), which clearly show the entry conditions. The trading strategy has a simple set of rules to follow, while the conditions can be developed to a simple and clear algorithm to execute. There is no need to use feelings or intuition to determine trends or breakouts as all of the market conditions are described precisely. All traders need to do is just follow the rules. In addition, the strategy is safe in case if traders would use the money management rules, opening deals for a small portion of the trading account. The strategy is flexible and scalable, it could be used on a wide range of assets and timeframes.

How to use Magic breakout Indicator

The Magic breakout forex strategy is based on three technical indicators. As long as the main condition of the system is for the market to be trendy, and it does not work well in sideways ranges, we need to have some kind of a marker on the price chart to see whether the current trend is in a good shape, whether the momentum is strong and the trend is sustainable. This is why a pair of exponential moving averages are used in the trading system. The period of both EMS has to be modified to 34 instead of 9 as the default parameter. And the main feature to be changed is how to apply the calculation of EMA curves. Traditionally, the technical analysis uses close prices to calculate the EMA formula but we change to high for the first EMA and to low for the second one. As a result, we had get a so-called wave of two curves. It is extremely important for the price to stay above the wave of two EMA for the uptrend and to be well below the wave for the downtrend.

Another important part of the technical analysis is represented by the Commodity Channel Index in this trading system. The CCI indicator is a kind of oscillator and initially, it was designed for trading commodity futures contracts. However, traders had found its effectiveness in other assets and CCI oscillator became popular among all of the asset classes including currency pairs, shares, stock indices and even cryptocurrencies. The only change which has to be made for the CCI parameter is to shift the period a bit. The default setting is 20 bars for the period (days or hours depending on the timeframe) but we prefer using 21 as the period. It is not recommended to use the 34 periods (the next Fibonacci figure) as the indicator will become too slow in that case and we would not find the best breakout signal.

Once we prepared the chart setup, it is time to move forward the entry conditions. But before we describe the exact trading algorithm we need to explain a couple of things and show the perfect moment of an entry point. As it is been already mentioned above, we seek trends but not sideways ranges. If you see the price hovering around the EMA wave several times, just switch the asset as the Magic Breakout System is not applicable for that market condition. We need to find a period when an asset is trendy. Retracements happen during any trend and we will focus our attention on a chart which has the current price bouncing back to the wave of two EMA curves after a period of being above/below the wave for quite a while. We start monitoring the current price more closely and we need to wait for a moment when the price goes out of the wave again (crosses the EMA34 high from downside up for the uptrend conditions and crosses the EMA34 low from upside down for the downtrend conditions). After that, we implement the rule of 5 candles and we start monitoring the CCI indicator. If the current price stays above the EMA34 high during 5 candles, and the CCI indicator crosses the +100 line, then we open long positions. Fort he downtrend, the condition will look like this: The price has to stay below the EMA34 low during 5 candles in a row after it went out of the wave, the CCI indicator has to cross the -100 line from upside down, then we open a short position.

Here is an example of the Magic Breakout System in action:

Magic Breakout Forex strategy - How that Works
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