Forex Strategies and Tips
BOB - The Break of the Break
This is one of our favorite strategies we invented after several years of trading.
Many people trade consolidation breakout patterns, and for good reason. They are some of the most reliable signals you can find. But we think that if you add BOB to your plan, you'll discover you can avoid many of the false breakout and losses that go with these trades.
Years ago we took a seminar with John Bollinger, the renowned trader who came up with Bollinger Bands. One thing he said really stayed with us. This is a paraphrase of the idea:
It is very hard to predict whether price will go up or price will go down.
But there is one thing you can predict with great reliability:
Periods of volatility will give way to periods of consolidation, and periods of consolidation will break out into volatility again.
When we really thought about that we realized how profound that is. There is so much uncertainty in the markets... any little bit of certainty we could find would give us an edge over other traders - and that could make all the difference. We were right.
But the trouble with trading consolidation breakouts is how often the break is a fake. Bollinger acknowledges this too.
Whether the false breaks are due to the manipulation of the brokers as some think, or the push and pull of bulls and bears, solar flares on the sun or who knows what – doesn't really matter. The trick is using a solid plan about how to deal with them.
Then one day we came up with this:
The above chart is a perfect example. If you had jumped going long as soon as that candle broke out of the box you would have been stopped out very quickly.
But check this out: If you had waited for that candle to finish and then put a Buy Stop above it, you would never have been picked up. Safe.
Let's look ahead to see what happens next with this same consolidation band...
Again instead of risking getting stopped out with a false move, let's wait for this candle to finish forming and then put a Sell Stop below that break-out candle. Let's wait for BOB - The Break of the Break.
We can put our pending order in and leave it running for awhile (we'll talk later about when to pull a pending order for this trade).
In this particular case, our short was picked up 2 candles later. A decent stop would not have been threatened (see our articles for where to place stops) and there was still plenty of room for profit.
Many traders fear that if they don't take the breakout as soon as it breaks, they will miss out on some of the profit to be had.
But our experience is that a good breakout will have plenty of move left in it, and waiting for BOB – the Break of the Break – saves us from so many losses that it is worth waiting for that additional confirmation.
Examples of Breakouts with BOB
Where To Place The Stop Loss
First a reminder: the heart of money management means you always define your risk BEFORE you enter a trade. Using a set Stop Loss with a trade is essential.
It is also important to understand the influence of BID versus ASK in the placement of these stops, as misunderstanding when to add or subtract spread from your intended price causes many unintentional losses.
With the BOB consolidation break out trade, the placement of the stop loss will depend on the nature of the consolidation.
Tight consolidation bands:
Use a stop on the opposite side of the band itself.
We always add a bit of a pad to that as well, since we think of price lines as zones, not exact prices. The size of the pad depends on the overall volatility of the currency pair and the time frame you are trading. And using the Advanced Calculator makes adding a pad very easy.
Somewhat open consolidation bands:
In this case we may not want to take a stop as far away as the opposite band, yet there may not be swing structures within the band that are strong enough to hide our stop behind.
We use a percentage stop for somewhat open bands, which is easy to do with a Fibonacci tool on your charting platform. Price often comes 50% back into the band and then carries on with the good breakout, so we give it that much room. We will let price come back about 62% of the way into the band before calling it a fail (stop out). If the band is not too large we may even go to 78%. But an open band that cannot hold a 78% retest usually fails anyway, so that's the most we'd go.
Very open consolidation bands:
Look for swing points within the band that may serve as good shields for your stop. Price may come back into the band to retest these points before continuing on in your direction.
And of course if price tests these shields and breaks them, that is often the sign the trade may fail, so your stop there will be warranted.
No Trading Strategy Will Work Every Time
We have found this to be a very solid strategy for Forex trading; but remember, there is no such thing as a strategy that works every time. Please read our Risk Disclosure.
Losses are part of trading, but if you are using the Advanced Calculator, you can make sure you are not taking any loss bigger than you intend to or have budgeted for. Read more about using a risk profile.