The Forex Chronicles

Inside Bar Breakout Trade on US Crude Oil – 11 October 2023

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Trade Set-Up

The tragic events that took place in Gaza over the weekend unsurprisingly caused the price of oil to spike sharply upwards on Sunday evening and into the early hours of Monday morning.

However after hitting a high of $86.11, the price of US crude oil price subsequently dropped back, and much to the surprise of many oil traders, it did in fact trade sideways in a fairly subdued manner on Monday and Tuesday.

This set up an excellent trading opportunity for breakout traders because if you check out the daily chart below, you will see that there was a double inside bar set-up, with both bars trading within the range of Sunday’s bar, which is generally a high probability set-up:

Trade Execution

When you get a set-up like this, you can either wait for the price to break the high of Tuesday’s candle to go long, or wait for the price to break the low to go short.

For extra confirmation, you can wait for a breakout on a lower timeframe, followed by a retest and then a continuation breakout, but by doing this, you run the risk of missing the trade altogether if the price drives straight through the high or the low without pulling back to the entry level.

A lot depends on the pre-breakout price action. Ideally you want the price to consolidate near the breakout level for several candles, because then the price has the potential to move a lot further from the breakout level straight away, but this didn’t occur here.

Anyone taking the breakout on the 5-minute price chart, for example, would have noticed that there was a lot of choppy price action after the initial breakout, as well as a few price moves back above $84.00 that may have taken them out before the big drop lower occurred if they used a relatively tight stop loss on this lower timeframe.

That’s why it’s often better just to stick to the daily chart when trading inside bar breakouts, reduce your trade size and use wider stop losses instead.

If you had done that here, you could have entered a short position on the breakout, placed your stop loss at yesterday’s high and still banked an excellent profit based on a 1:1 risk reward, without having to worry about short-term volatility.

Indeed you wouldn’t have even seen this initial volatility on the daily chart if you were looking at the chart at the end of the day.

Closing Comments

I didn’t take this trade myself because I was away from my computer this afternoon, but I just wanted to discuss this set-up on US crude oil because you don’t see these double inside bars very often, particularly on a volatile market such as oil.

However they are always worth paying attention to because when the price does eventually break the high or the low of the most recent inside bar, you can get some very big price moves in the direction of the breakout, as was the case here with a price drop of over 180 points from the breakout level.

Opening Range Breakout on US Crude Oil – 14 June 2023

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Introduction

Opening range breakouts can be some of the easiest and most profitable trades to execute when you get some good set-ups, and today we had a textbook set-up on the US crude oil market.

I like to wake up and start scanning my charts around 7 AM UK time, and as we got closer to 8 AM, it was apparent that US crude had been trading in a very tight sideways range since around 6.15 and was poised to break out of this range, either upwards or downwards, once the London market opened.

With the price hovering just above the 10 and 20-period EMAs on the 5-minute chart, and bearing in mind that we were sitting right on yesterday’s high, I wanted to see a downwards break, and that’s exactly what happened:

Trade Execution

With this type of set-up, it is best to either enter a trade on the 1-minute chart or enter a position based on pure price action.

That’s because if you wait for the 5-minute breakout candle to close, you will often find that a large part of the move will have taken place already, and subsequently you will be entering too late.

I myself did the latter and entered a short position straight after the London market opened when I saw the price starting to tick down fast, getting in at 6973.7, ie $69.737.

I placed my stop loss at the high of the previous 5-minute candle at 6982.3, 8.6 points away, and I was initially planning to exit half the position at VWAP, approximately 18 points away and indicated by the thick black line on the chart, and then let the other half run in case the price blasted straight through it.

As you can see, the VWAP ended up acting as support as it so often does, and after closing half the position at VWAP, the price came right back up and nearly took me out at break-even.

However thankfully the price came back down and I eventually decided to close the other half out at VWAP once again when I had the chance because it wasn’t acting right.

So the total profit from this trade was around 18 points, representing a reward to risk of over 2 to 1, which I am always more than happy with.

After all, if you can find risk-reward trades of 1-2 (trades that return 2 points of profit for 1 point of risk), if they only work out 40% of the time, for example, you will still earn some decent profits in the long run.

Closing Comments

The main point I wanted to get across is that the opening few hours of the London trading session can be very profitable if you like to trade opening range breakouts.

The key is to find markets that have traded in a very narrow range leading up to the open because in the case of US crude, for example, we know from my last post that it trades in a range of around 236 points on average at the moment.

Therefore when it traded in a 30-point box from 6.15 to 8.00 AM UK time, something had to give. It was inevitable that we would see a breakout. All I had to do was be patient and jump on board when it eventually happened.

Of course there will be false breakouts from time to time, but when this occurs, the secondary breakout will often be the one that cancels out the initial loss and brings in the big money.

So always try to look out for sideways consolidations in otherwise volatile markets because the price is very unlikely to stay in this tight range for very long.

5 Hourly Inside Bar Candles on the USD/JPY – 19 May 2023

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Introduction

I have always been a big fan of inside bar set-ups because these provide you with a low-risk, high probability entry point that can potentially have high rewards.

You can either trade them on the shorter time frames, such as the 5 or 10-minute charts, for example, to scalp a few points, or you can use them on the 1 hour, 4 hour or daily time frame to target even bigger moves.

The reason why they work so well is because you get a wide trading range with the initial candle followed by a series of smaller indecisive candles that all trade within the range of this first bar.

So when the price does eventually break above the high or below the low of the first bar/candle, the move can be quick and decisive as it will often quickly gather momentum and continue moving in the direction of the breakout.

USD/JPY Set-Up

I wasn’t at my computer during the Asian and pre-London trading session on Friday (19 May 2023), but as I was reviewing my charts this weekend, I noticed what would have been a really great set-up on the 1 hour chart of the USD/JPY pair.

There was a large red candle at 1.00 AM UK time right at the start of the Asian trading session on the USD/JPY pair, followed by four very small candles that all traded within the range of this initial candle between 2 AM and 6 AM, as you can see below:

Trading Opportunity

With a narrow triangle forming on this inside bar set-up, it was only a matter of time before the price broke upwards or downwards out of this tight range, and when it did occur the hourly breakout candle closed at 7 AM, just when volume starts to pick up before the London market opens.

Therefore it was always likely to continue moving, and in this case if you had taken a short position at the close of the breakout candle at 138.28, you could have ridden it down to the 138.00 whole number or closed a partial for 28 pips profit, where it ended up finding support.

You could also have zoomed into the 1 or 5-minute chart to get an earlier entry point during the 1-hour breakout candle once it looked likely that this breakout was likely to continue.

Final Thoughts

Of course it’s easy to talk about these profitable set-ups after they have occurred, but the point is that these inside bar formations occur all the time, and when you a get a long extended set-up of 5 hourly candles in this case, the odds of success are extremely high when the breakout does eventually happen.

Therefore you always want to be scanning the charts of various pairs (on various time frames) to try to visually spot them when they are setting up because they can be very profitable to trade.

Crude Oil Intraday Set-Up – 19 May 2023

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Introduction

Many forex traders will tend to focus all of their attention on the major forex pairs, such as the GBP/USD, EUR/USD and USD/JPY pairs, for example, but the oil markets can be just as profitable, if not more so, when day trading.

That’s because you can often get 200-300 point swings in a day, and there is generally lots of volatility during the London and New York trading sessions, which makes it easy to find one or two high quality set-ups.

One such set-up presented itself yesterday on US crude oil yesterday (19 May 2023), as I will now discuss in more detail.

Previous Price Action

Going in to Friday, I knew that Thursday had been an inside bar on the daily chart of US crude. Therefore I was expecting Friday to potentially be a more volatile day with a wider trading range.

My bias was towards the downside because I was looking for the price to break below the Thursday low of this inside bar, and make a sustained move downwards to erase some of the upward momentum of Monday and Wednesday.

Early Morning Price Action

The low of the inside bar was $71.54, so this was the key level that I was looking at, but as you can see from the shaded rectangle that I drew on the chart, the price was trading in a narrow range during this time and was nowhere near this key level. Therefore a breakout was looking unlikely at this stage.

The price did break out of this channel at around 9.15 AM (London time) but was still around 70 points short of this key level even at the low. So it wasn’t really worth trading the breakout at this time.

Failed Breakout

This attempted breakout ultimately failed, and the price came back into the early morning trading range, before breaking upwards outside the high of this range.

When this happens, you have to accept that your bias towards the downside may be wrong, and it may be worth considering trading an upward breakout of the inside bar instead (which stood at $72.96).

Weekly Resistance and Inside Bar Breakout

Looking at the daily chart, I was aware that there was very strong resistance around the $73 level from Wednesday and Thursday, and indeed from previous days earlier in the month, and this was reflected in the price action because the upward momentum started to stall as it got towards this level.

I knew that we could get an attempted breakout into higher ground if we could stay within 20 or 30 points of this key level, and so when the large red candle on the 5 minute chart failed to result in a pullback, and instead started to trade in a very narrow range, it was time to sit up and take notice.

Taking the Trade

I have talked about 5-minute momentum trades on this site before, and how they can be very profitable in the right trading conditions, and this looked like being one of them.

The 10 and 20-period EMAs were now very close to each other on the 5-minute chart and this new trading range was sitting right on the high of the previous trading range.

It was just a case of watching the price action and waiting for a strong green bullish candle breaking upwards outside of this very narrow range.

Here is a zoomed in view of what happened…

After two inside bars followed by a green breakout candle, I took a long position on the close of this candle at 72.87 with a stop under the previous candle low of 72.73.

My stop was therefore 14 points, and I was hoping for a profit of at least 2 times my risk, ie 28 points.

In the end I closed out my entire position at 73.25 for a profit of 38 points and a risk/reward trade of around 2.7 after I had moved my stop loss up to this level and was stopped out, which I was more than happy with.

I was hoping that the upward momentum would continue for a much bigger move, but even after I was stopped out, the price only reached a high of 73.56 and the breakout quickly fizzled out and reversed sharply later in the day as longer term traders banked their profits from previous longs earlier in the week.

Final Thoughts

The point of this article was not to brag about having a profitable trade on US crude oil yesterday (I have just as many losing trades as winning trades, just like most traders), but merely to walk you through my thought process regarding this potential set-up, and to demomnstrate the profit potential of these momentum trades from tight trading ranges on the 5-minute chart.

These high probability set-ups don’t come around that often each day, but you need to keep an eye out for them because they can be fairly profitable when they do come along, and because the price is breaking out of a narrow range, you can keep your stop losses small and go for bigger wins of 2 or 3 times your risk, which are the trades that we all want to find.

Bitcoin Downward Price Breakout – 25 May 2020

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Bitcoin As An Investment

For a long time I wrote Bitcoin off as nothing more than a purely speculative asset with no real tangible value.

In some respects that still holds true, but with more and more fund managers considering adding it to their portfolio as a way to become more diversified, and as it becomes more accepted as a store of value, I have become increasingly interested in this particular cryptocurrency.

Indeed I am planning to invest 1% of my eToro portfolio into this asset at some point in the future for these very reasons, and am starting to see it as a viable long-term investment for both myself and my copiers.

Downward Price Breakout

The price of Bitcoin has been slowing trending upwards for several months now, and with it trading between $9000 and $10,000, I haven’t been at all tempted to buy in at this kind of price level.

However if you look at the daily price action of Bitcoin just recently, you will see that it has broken below the lower trendline over the weekend and today, indicating that the upward trend may now be over, and we may be seeing the start of a new downward trend.

Bitcoin Downward Price Breakout - 25 May

Therefore I might start becoming more interested in buying Bitcoin if this downward breakout gathers some momentum, and we start to see a serious price move.

At the moment it is too early to tell if this breakout is going to have any real momentum behind it. Ideally we want to see an initial breakout, a pull-back back to the trendline and then a continuation move downwards for confirmation.

If this happens, then we can use fibonacci retracement levels to give us possible price targets, and in this case a 50% retracement of the upward price trend gives us a price of $6989 and a larger 61.8% retracement gives us a target price of $6262.

Either of these two price targets would give me a much better entry point for my 1% investment and would make me a lot more confident about my investment.

Final Thoughts

You may be thinking; is it worth shorting Bitcoin at this point? Well if this was any other instrument and if it had the same chart pattern, then yes it may well be worth opening a short position, but the spreads and fees on Bitcoin are simply too high for my liking.

Furthermore, with Bitcoin there are no fundamental reasons why the price should be higher or lower than it’s current value because nobody knows what it’s true value actually is. It is driven purely by volume of buys and sells, ie sentiment.

I see Bitcoin as a store of value and another means of diversification, and for that reason I am more interested in adding it to my long-term portfolio, but I am not really tempted to trade it up and down at the current time.

That’s why I highlighted this latest downward price breakout. If it starts to head strongly lower and takes out one of the key fibonacci levels, it could then become a buy because at that point it would be highly likely to bounce back, and would also be a great entry point for a long-term investment.