Inside Day Breakouts

An inside day is one where trading is contained within the trading range of the previous day.
The volatility breakout strategy entails entering a trade on a stop order above or below the range that has been previously trading - with the expectation that since a breakout has occured price will continue to move in that direction.

Volatility breakout systems are based on idea that if the market moves a certain percentage from a previous price level, the market is likely to see follow through in that direction. In this scenario you are looking for a continuation of the move based on momentum.
One should look for a series of inside days to implement this strategy, and the greater the number of inside days that transpire, the higher the probability of a breakout.
Also, the longer the timeframe used, the stronger the breakout opportunity - hourly and daily timeframes are the best to use.

This strategy is also best used with pairs that see tighter ranges - these are typically the crosses - currency pairs that do not have the USD as part of the pairing such as the EUR/GBP and the EUR/CHF.

Inevitably there will be false breakouts, as the interbank dealers try to trigger the stop orders just outside the breakout levels.
In order to avoid being caught in a false breakout situation, enter your trade with a stop order at least 10-15 pips above the breakout level - meaning the levels above or below the trading range depending on whether the market is breaking out to the upside or downside.
(In case you are not clear on this - a stop order is one that is placed above or below where the market is currently trading and becomes a market order when the market touches the price where the stop was entered. A buy stop is placed above the market and a sell stop is placed below.)

Again one can look to the ADX as an indicator to whether the market is still range bound or beginning to trend one way or another.
Stay away from inside day breakout trade if the ADX is below 20 and trending downward.
The breakout strategy is valuable in that it teaches the trader to do something that is normally counter intuitive - that is to buy the high or sell the low. Novice traders are more likely to try to pick tops and bottoms.
Often the breakout will occur in a fast moving market, making decisiveness even harder. However, if your strategy is in place and you have identified the opportunity, you will be ahead of the game.

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