A beginning trader, however, may have difficulties in framing a simple but effective options and forex strategy on his very first day. This low volatility breakout strategy creates a scientific approach to consolidative price action to unlock the ultimate potential entry.
The trading process is more simplified because this method has enhanced profit possibilities with overall manageable levels of risk.
Understanding the Core Principle
Low Volatility Leads to High Volatility
The very bedrock of the strategy is based on a simple premise: periods of low volatility in the market lead to sharp increases in the same. Those who get into positions during these times of low volatility tend to benefit the most when the market starts swinging. This is important because large volatility means greater price swings, thus greater potential for profits.
The idea is to be positioned in front of the volatility spike, not behind it after it has spiked.
Indicators Used in the Strategy
In practice, this strategy will include the following four moving averages:
- 15 EMA: Moving average that is representative of the short-term trend.
- 50 SMA: The simple moving average indicates the medium-term trend.
- 100 SMA: Helps assess longer-term trends.
- 200 SMA: It indicates the very long-term trend in the market.
These moving averages have been implemented for various reasons. They help in identifying whether the market is in consolidation or a trend and act as a basis for entry and exit points. Although there is no magical reason behind these numbers, the main reason is using a combination of different timeframes. This ensures traders can view the market from the short, medium, and long-term perspectives that help in the identification of low-volatility periods.
Identifying a Consolidating Market
The first step before trading is to determine whether the market is consolidating. A consolidating market is characterized by price action that remains within a tight range without much volatility. To identify this, look for:
Price Action
The movement of the price bounces or fluctuates mostly within tight spacing of support and resistant levels.
Moving Average Behavior
When the moving averages, such as the 15 EMA, 50 SMA, 100 SMA, and 200 SMA, are bunched up or horizontal, it means that consolidation is taking place in the market.
Volume
During consolidation, volume usually decreases, indicating no buying or selling pressure.
Low Volatility Breakout Entry Criteria
Price Breaks Above the Upper Moving Average
The first sign that one may want to watch would be price breaking above the highest of the four SMAs, the 200 SMA. It signifies the switch from a low volatility environment into a breakout phase of price action.
Price Breaks Above the Previous High
It is not sufficient that the price breaks above the moving average; it must also be able to make a high above the high of the previous bar. This confirms that there is good upward momentum.
Close Above the Previous High
The close is the final confirmation. Confirm the close to be above the high of the bar preceding the one in consideration to validate the breakout. A close above previous high shows that the buyers are dominating and the breakout is likely to go up more.
Example of the Strategy in Practice
Imagine seeing a forex chart where price is moving sideways between support and resistance levels for several hours or days. The moving averages are closely aligned together, meaning that it is a period of very low volatility. Then, suddenly, the price breaks above the 200 SMA and the high of the last bar, closing above it. This is the signal to enter the trade.
Entry
Buy when all the above conditions are met.
Stop Loss
Just place your stop-loss below the low of the bar where the breakout happened.
Take Profit
You can place a target based on some previous resistances that are important; otherwise, you could also set a risk-reward of 1:2 or higher—whatever your preference is.
Risk Management and Reward Potential
Risk management is a must for every successful day trader. By doing so, you open yourself to opportunities that boast a very attractive risk-to-reward ratio, usually much higher in reward value than the accompanying risk. For example, in case you enter a trade with your stop-loss below the breakout bar and the market then moves in your favor, traveling a field distance from your entry, the risk-reward would be 1:3 or more.
Benefits of the Low Volatility Breakout Strategy
Simplicity
This strategy is straightforward, making it accessible to traders with limited experience.
High Win Rate
This approach focuses on significant price movements following consolidation, increasing the probability of capturing large gains.
Effective Risk Management
With a clear entry point and stop-loss placement, traders can control their risk effectively.
Maximum Profit Potential
The strategy exploits the fact that low volatility in markets will always morph into high volatility.
Final Success Tips
Be Patient
The success of this strategy lies in the wait for the perfect setup. Do not force trades when market conditions are not in the consolidation phase.
Stay Disciplined
Do not infringe upon the rules of your strategy, never make wild bets.
Try a Demo Account
Before this strategy is applied to the live markets with real money, it would do a lot of good for you to test it out first in a demo account to make you confident and fine-tune your technique.
Bonus Tip
Looking to further improve your trade timing? Then try a market timing indicator. This will allow you to pinpoint exact entry points in any type of trade and greatly increase your accuracy and total success in trading. You can learn more at indicatorwebinar.com, where you can watch their free webinar on how this tool works.
Conclusion
The low-volatility breakout is an effective, yet simple approach toward trading, promising huge gains and a very small risk of losses, if played right. Besides the above-mentioned set of rules, much more can be added to creating a disciplined trading plan which will assure the sound basis of day trading for the beginner.
