The key element in a box breakout strategy is of course, identifying and drawing your boxes.
In order for a box to be a Box, you must have a defined high, and a defined low that price cannot break. The more filled up your box is, the stronger it is, and the easier it is to place your entry and stop loss. The longer the duration of the box, the stronger your anticipated breakout will last.
Box Drawing Guidelines
1) Always look at all your time frames! You have to keep track of the big picture and the little one!
2) boxes in higher time frames (4H and up) are more important then boxes in medium frame (30min/1H), which are more important than 5min/15min. You want the price to test the upper and lower bounds of your box repeatedly, otherwise its called a crap-box.
3) box within a box within a box (like inception). If you find yourself stuck in a huge box that ranges.. say.. 100 pips, you can zoom into a faster time frame to find intermediate boxes to enter/exit from, for a precision entry. The best setups for these guys, is finding intermediate boxes at the outer limits, versus the middle of another box. The limits on different time-frame boxes allow for you to enter/exit at those limits.
4) The more filled up the box, the stronger it is! See below!
Great boxes are compact, and the ends are easily definable. Okay boxes are definable to some extent, but the ends are not tested repeatedly like a great box.
Poor boxes are technically consolidation region, but the problem is, you don’t know where the ends are! Price is consolidating as market is deciding whether to continue the move, or stay, so there is a huge battle to determine the ends. Because of the vagueness, you can’t get a good entry.
entries and exits:::
1) Its good to place your stops outside the box in the opposite direction, never on the boundary, or inside it. When you are unsure of a movement strength, move to break-even asap!
2) I usually aim for a “strong support/resistance zone” to exit and enter, because this is when price typically reverses (even if its temporary)
3) ALL support/resistance zones near the breakout box will always be broken. Support and resistance is more like a rubber band than a wall, because price can push past it by sheer momentum, before it bounces back. If you are anticipating a big move and you want to trade against it, you would move your entries farther away to account for the momentum and rubber band effect.
4) price tends to re-test previous consolidation areas. If you have a very nicely drawn box in a higher time frame, this is the perfect chance to enter a bounce trade (anti-direction) to score more pips! Here is an example of a box-test:
5) the most important thing for entries and exits- is DETERMINE THE MARKET! Is it high volatility or low? What session are you in? What news is coming out this session? And can you spot the market catalyst? The two things you need for a breakout, is HIGH VOLATILITY, and a CATALYST. I’ve been able to pull 10:1 returns when I spot it and get a good entry in.