Daily Price Action
Shares

How to Enter a Market Before the Breakout

Shares

Businessman using crystal ball

Happy Friday!

This week’s question comes from Sherry, who asks:

How can I overcome the fear of missing out just before a market breaks out? I’ve gotten better at identifying patterns and momentum, but often miss moves because the market doesn’t retest the broken level.

Trading breakouts is one of the most enjoyable and profitable techniques I employ. There’s nothing like catching a 500 pip move that you saw coming from the start.

But what about when you miss that 500 pip move?

It’s gut wrenching, I know. You wait days or even weeks for the breakout, only to watch the market take off without you.

I’m a firm believer in the idea that the next quality setup is just around the corner. If you miss a big move, it’s better to stay focused on the road ahead than to beat yourself up over something you can’t change.

One to two messages daily. You can unsubscribe at any time. See our privacy policy.

However, there’s no doubt that a 500 pip profit is a big miss when trying to build a trading account.

So in the spirit of doing all you can to catch favorable setups while protecting your capital, I wanted to share a method I’ve been using recently that helps me make more money while protecting what I have.

By the time you finish reading this post, you will know how to enter a market before it breaks out. In doing so, you will simultaneously remove the fear of missing out (FOMO) from your trading and also increase your risk-to-reward ratio.

Read on to learn how I caught the recent GBPJPY sell-off before the market even broke down.

Also be sure to check the comments section below for a little extra food for thought on today’s topic.

Step 1: Identify the Pattern

The very first thing you need before you can even consider trading a breakout early is a technical pattern.

Of course, it could also be something as simple as a horizontal level. However, I’ve found that this technique tends to work incredibly well with channels.

Let’s use the GBPJPY ascending channel below as an example.

GBPJPY ascending channel

There’s no denying the pattern above. Both support and resistance are well defined. The market is also respecting the levels on the daily time frame, which is what we want to see.

Another factor here is the time it’s taken the market to carve this ascending channel. Over the years I’ve discovered that the longer a pattern takes to form, the more reliable and profitable the resulting breakout is likely to be.

This channel on the GBPJPY certainly hasn’t disappointed.

Step 2: Evaluate the Context

As I mentioned a couple weeks ago, context is key. Whenever you get confused about whether a particular pattern is bullish or bearish, sometimes all you need to do is click the “zoom out” button.

Seeing the multi-year trend and structure can bring clarity to any technical pattern.

You’ll recall how the GBPJPY twelve-month ascending channel took on a more bearish tone once we zoomed out to view the last five years of price action.

Here’s the weekly time frame:

GBPJPY weekly time frame

We can now see that this was nothing more than a short-term uptrend amid a long-term downtrend.

When I see something like this, I immediately switch to watching for selling opportunities, but not until I have reason to believe a breakdown is imminent.

That brings us to step three.

Step 3: Watch for Signs

In the last Q&A post, a few readers asked how I would have entered short, considering the pair hasn’t retested the broken level.

Update: The GBPJPY did, in fact, test former channel support as new resistance late last week.

You may want to visit that post (link above) before proceeding. But in case you don’t get a chance to review it, here’s the ascending channel I was watching:

GBPJPY ascending channel

The truth is, I actually shorted the GBPJPY before it broke down from the channel above.

Here’s what I posted in the member’s area at that time:

GBPJPY 1-hour level

That post was made on May 21, just two days before the GBPJPY broke from the twelve-month channel.

And as you may have guessed, a break of the intraday level shown above is where I began watching for a short entry.

Here’s what happened next on the 4-hour time frame:

GBPJPY breakdown on 4-hour time frame

If I hadn’t sold following the break of the smaller trend line, I probably would have missed this 500 pip move. Note how the market never actually retested the twelve month level as new resistance, at least not right away.

This technique of entering early also works incredibly well when pyramiding. If you’re able to catch a breakout before it begins, you can add to the position once the break is confirmed.

Now, to be clear, I don’t usually trade anything below the daily time frame. However, in this case I was already convinced that a breakdown was coming and I wanted to be on board for the move.

I also knew that the market may not retest channel support following the break. The yen pairs can move quickly under the right conditions, especially if fear begins to crop up across the market as a whole.

By the time the pair began to break the intraday level above, it had already carved a lower high in April. Remember that from the last Q&A post?

The GBPJPY was also rebounding from channel support for the second time in two months. That may sound bullish—until you realize that it was the first time the pair tested this support level without first retesting channel resistance.

What’s the significance of that?

You may recall that I’ve written about this type of “heavy” price action before. Whenever you begin to see a market lean on a level like the GBPJPY did, it’s a sign that a breakout is imminent.

No Retest, No Problem

One of the toughest challenges for any trader is determining whether or not to wait for the all-important retest following a breakout.

For those who aren’t familiar with this, let me give you a quick example.

Let’s assume for a moment that the EURUSD has just broken ascending channel support amid a downtrend. Let’s also assume that the support level is 1.70.

So the pair has closed the day below 1.70 (remember, I use New York close charts which means a 5 pm EST close).

Once that happens, the ideal scenario would be a retest of the 1.70 level as the new resistance level. That retest is where you would watch for a sell signal such as a pin bar.

However, the market doesn’t always play by the rules. There will be times when the market breaks out and then takes off without a retest. This is especially common in strong trends.

So what’s the solution?

One solution is to enter before the breakout occurs. Using the steps above, you can do this with relatively low risk and if you do it right, you can actually increase the potential reward.

That said, there is no technique that will allow you to catch every breakout. No matter how long you trade and how good you get, there will always be markets that get away from you. That’s just part of the job.

But as I often say, you only need one favorable trade each month to grow an account. So with that in mind, be sure to use the technique discussed above sparingly.

Final Words

I don’t usually enter a market before it has broken free from a technical pattern of some sort. However, it is something I’ve started experimenting with more over the years, and the results are promising.

Not only does it offer a more favorable risk-to-reward ratio, but it also eliminates the fear of missing out after the break. Since you’re already in the trade, there’s no need to stress about whether or not the market will retest the broken level.

However, it’s essential that you evaluate the context of the technical pattern before attempting to enter early. You need to have a firm understanding of what the market is telling you. Otherwise, you will get caught on the wrong side of the market.

It’s also important to watch for signs of strength or weakness. This is what will give you the early signal to go long or short before the breakout. These include things such as channels, trend lines and even swing highs and lows.

Last but not least, take care with this technique of entering early. While it can produce more than favorable risk to reward ratios, it can also backfire if you aren’t careful. As always, it’s best to experiment in a demo account or with relatively small position sizes in your live account.

Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.

Leave a Comment:

45 comments
Justin Bennett says

Note: Use the same technique above on the NZDCAD post I put out on Friday. You can find that commentary here:

https://dailypriceaction.com/daily-setup/nzdcad-keep-this-on-your-radar-next-week

It’s the same situation only on a much smaller scale. The NZDCAD formed a 4-hour ascending channel (pattern) amid a downtrend that began several months ago (context).

The market then began to lean on channel support and was unable to retest the channel top (sign of weakness).

So you see, you may not need to wait for the breakout to begin buying or selling. This technique isn’t for everyone, but once you get good with it, you’ll be wondering why you even wait for the breakout when there’s a 90% chance it’s just around the corner.

Reply
    Tagus says

    Hi, I like your ideas and I have personally trying to use a similar technique, however you structure it really well here in terms of technical analysis. Do you complement with fundamentals of any sort?

    Reply
      Justin Bennett says

      No, technicals only.

      Reply
Nita says

I have learnt so much since joining DPA. This is another brilliant lesson Justin thank you.

Reply
    Justin Bennett says

    You’re welcome. Glad to hear that. 🙂

    Reply
Tim Patenaude says

Hi Justin,
Great TA. Thank you.
If you are entering on the 4hr channel, do you watch the Daily after entering and what about DD? Or do you complete that particular trade on the 4hr only?

Reply
    Justin Bennett says

    Hi Tim, the time frame you switch to isn’t all that important. You could enter on the 4-hour and move to the daily; I see nothing wrong with that.

    Reply
irfan says

thanks justin it was never easier for me to learn trading on myself so easily as i am reading your blog everyday and i am convinced now that i can be a better trader myself rather than depending on the signla servicers by nerds

Reply
    Justin Bennett says

    Ha, pleased to hear that. It sounds like you’re aware of the fact that I’m not a fan of signal services. It’s far better to learn how to trade. Otherwise, you may as well just invest in a few index funds and call it a day. Just my opinion, of course.

    Reply
      Ghulam abbas says

      Hi Justin you are genius trader I like your trading style

      Reply
LE Van Huy says

Good article and meaning. thank you very much. I learned a lot from you !!!

Reply
    Justin Bennett says

    You’re welcome. Cheers.

    Reply
Yusuf Ahmad says

Good one, but recently you didn’t say anything about Eurjpy.
Thanks.

Reply
    Justin Bennett says

    You’re welcome.

    Reply
antonio says

Molto Interessante. Bravo e a presto visto che a breve aprirò un conto con blueberry
Grazie ciao

Reply
LE Van Huy says

gj 148.00 hit the road below the parallel channel. Check that price as a resistance and then go down. We may sell at current prices when closing last week. welcome you for comments!

Reply
Jibrill Gariba says

Hello Justin, thanks a lot for this great piece. Please I would like to know when one can exit the trade. For example, if one is able to catch the breakout, which in your case the 500 pips, and the market is to retest the support (new Resistance) how do you identity the possible retest so you can exit your sell trade since the market might start moving against your direction.

Secondly how do you manage your trade when there’s an upcoming high impact news when you’re already the trade? Also, how long do you hold a position and how far do you think the GBPJPY will go. I thank You

Reply
    Justin Bennett says

    To exit, you need to use your key levels. It also depends on the pattern you’re trading.

    You can search this site for “trading around news” or something similar and you should find what you’re looking for.

    Reply
Stanley says

Hi Justin

I would like to know why don’t you use fundamentals as they drive forex markets or any market.

I just want learn and you are very devouted and good at what you do

Reply
    Justin Bennett says

    Hi Stanley, I’ve always preached that the best trading style is the one that works best for you. It’s also about finding what interests you.

    For me, that’s price action. You have to follow your passion in any business, and trading is no different. Fundamentals bore me and I don’t need them to trade, so I don’t use them.

    Reply
      Stanley says

      Thank you Justin

      Your vast knowledge about the markets is world class and price action works.

      I am following you hard.

      Reply
Chukwudi says

Thanks for ur experiment I love it,that is nice one

Reply
    Justin Bennett says

    My pleasure.

    Reply
Imran says

Great. Which candles (Daily/Weekly) indicate big break out better?

Reply
    Justin Bennett says

    It isn’t the candle that’s important, it’s the close.

    Reply
Lawrence says

I think break outs are subjective

Reply
    Justin Bennett says

    I think most things related to trading are subjective, that doesn’t mean breakouts can’t be profitable.

    Reply
Mark says

Hello Justin

I joined your community in February and am so glad I did.

You have taught me to be far more focused on the bigger picture. Namely the daily charts and holding for longer.

Some weeks back you suggested looking at how many pips there are between the channels and this has helped me determine where to take my take profit! Thanks.

This weeks article is very thought provoking. Much appreciated.

Reply
    Justin Bennett says

    Hi Mark, it’s great to hear you’re enjoying the community.

    The bigger picture does tend to be more reliable, and it removes a lot of the stress that’s problematic for most traders. Once you experience trading from the daily chart, it’s hard to imagine ever going back to a lower time frame.

    Enjoy your weekend!

    Reply
sumantra Kumar halder says

Very important & learning diloug

Reply
Euphemia says

Thanks Justin for another fresh insight to your wonderful teachings and commentries. The explanations are precise and very helpful.

Reply
    Justin Bennett says

    You’re welcome, Euphemia. Feel free to reach out with any questions.

    Reply
auwal12k says

i really learn alot from you,,,
please what time do i need to analyze the market if im in nigeria, and what time frame do need to stick to as a begginer
tanks once again

Reply
    ADEYANJU says

    I will suggest you stick with daily time frame. And the best time to analyse in Nigeria is after 10:00pm Nigerian time. New candle must have opened by then

    Reply
Emmanuel Ayira says

Hello Justin, I do more of scalping for now. What’s the best way to scalp to profit?

Reply
Collin Gonye says

Thanks Justin
I recently joined your DPA it’s so educational .I have stopped using indicators and I’m now able to see what’s JCS will be telling me on charts. Your set and forget has helped me in a big way I was kind of getting married to all my trades resulting in not focusing on for opportunities. I followed you on the GBP/JPY ascending channel everything you said falled into place . I was busy trying to look for the same thing on the AUD/JPY for this coming week and I saw you coming up with the NZD/JPY ascending channel which has tested support for the third time now. My question is how do you manage to pick those kind of high probability trades because I really want to be like you?

Reply
michael+walker says

Dose the retest have to touche the S or R line.Suppose a strong pin bar upper wick is 10 to 20 pips from the support line or the same above it.Would you enter a trade and if so max gap from the S or R

Reply
Dale Kevin says

If you dont trade below the daily time frame, how many trades do you make in a month?

Reply
Howard says

Thank you Justin. This is very helpful. I am using the daily and 4 hour charts side by side which very much assists me in my timing of entries and exits.

Reply
Harry says

Brilliant…best mentor ever!
God bless you more

Reply
Mohamed says

What would accurately confirm that the breakout is Real

Reply
Emmanuel Idogei says

Very educative. i am new to forex and so i am just focused on learning and demo trading. Thanks for your effort to put this out…Emmanuel

Reply
Leonardo says

On GBPUSD the descending channel was broken and retest the level,daily close below the trend line 1.28328.my question as I’m learning channel breakout.will this be a continuation pattern.

Reply
Ola says

Hi. iam going to forwardtest my system, but i can’t figure it out how to enter when the price has retest the trendline. with pinbar or not. do you trade without pinbar at the retest? thanks

Reply
    Justin Bennett says

    I don’t usually wait for a pin bar to form following a breakout. If it does, great. If not, that’s okay too.

    Reply
Add Your Reply

close

33,000 Forex Price Action Traders and Growing!

Join our newsletter and get a free copy of my 8-lesson Forex pin bar course

You will receive one to two emails per week. See our privacy policy.