risk-to-reward-ratio

In this blog post, I will show you a trade example so you can see how to use bank breakout traps properly to maximize your profits.

This strategy is simple, easy, and very profitable when used in the right way. Let’s start with the first trade example.

 Look at the XAUD/USD H1 chart below:

breakout-trap-example

As you can see in the chart, the market formed a nice bank breakout trap pattern.

But you shouldn’t stop your analysis there; you have to switch to the higher time frame to see what’s going there.

Since the bank breakout pattern formed on the H1 timeframe, you can switch to the daily timeframe to see what’s happening.

Look at the daily chart of the XAUD/USD chart below:

breakout-traps

As you can see, the market was ranging and later broke out of the range. It then retraced to test the support which has turned to resistance. 

So, what do we do in this situation?

A lot of traders would get confused since they want to trade only if they see an up-trending market on the higher timeframe to align with what is seen on the hourly timeframe. However, this is not the way to look at it.

From the daily timeframe, we can see that there can be three scenarios:

  • The market can break the resistance level and keep going up 
  • The market can start the first impulsive move after this retracement to the support that became resistance 
  • The market can stay at this level for some time

 In this situation, the daily timeframe does not give us more information about what the market is going to do on the higher timeframe.

So, we simply switch back to the hourly timeframe to see if the trading setup is very strong.

If the setup is strong, we take it without hesitation, but if it is a weak trading setup we stay away. 

Now, let’s evaluate the trading setup on the hourly timeframe:

risk-to-reward-ratio

As you can see, on the hourly timeframe, the setup satisfies the following criteria: 

  • A false breakout of the resistance level: bank breakout trap 
  • A clear support level 
  • A clear candlestick signal (pin bar)
  • A good risk-to-reward ratio 

Important note: You can see that I decided to take the first resistance level as a profit target because we don’t know what is going to happen in the higher timeframe, so it is better to take our profits and get out as soon as possible.

If the higher timeframe was trending up, or at least at the beginning of a rally in a downtrend, we can take the upper resistance level as our profit target.

In those situations, we can correctly assume that the market has a big potential to go higher on the hourly time frame. 

Please, if you did not understand the explanation above, you can go back to the lesson on top-down analysis to see how we use the higher timeframe and the trading timeframe.

Back to the trade setup, you can see that we have all the criteria of a strong bank breakout trap, so we should take this trade since it provides us with more than a 3: 1 risk-to-reward ratio. 

But before taking the trade, we checked whether there was a confluence of many factors in support of the setup:

I used the RSI indicator to see if there is a divergence, but I didn’t find it.

However, when I used the Bollinger Band indicator to see if the lower Bollinger band rejected the pin bar signal, here’s what I found — see the chart below:

trading-with-breakout-traps

As you can see, when using the Bollinger band indicator as a confluent factor, it’s clear that the pin bar pattern was rejected from the lower Bollinger band, which is an indication that the market is likely to go up. 

So, using the Bollinger Band indicator gave us more confirmation to take this trade.

But in addition to that, look at what I found in the chart below:

trading-with-bank-breakout-traps

If you have been using the supply and demand trading method, you will clearly see that this area is a very strong demand zone, which means that there’s a high probability (even up to 99%) that the price would go up from there. 

Now, you have solid reasons behind your trading decision; you know exactly why you should take this trade.

In fact, if you post this analysis — with all these reasons behind your trading decision — believe me, the best traders in the world will be amazed at your way of analyzing the market. 

Here’s how we can enter this trade. See the chart below:

risk-to-reward-ratio

Once all our criteria are met, we simply place our entry at the close of the pin bar.

However, if we don’t have a good risk-to-reward ratio, we can use the 50% entry (see the lesson for pin bar entry methods). 

The stop loss should be placed below the lower shadow of the pin bar, while the profit target should be at the next resistance level. 

Now, look at what happened next:

trading-with-bank-breakout-traps

As expected, the market went in our favor as there were solid reasons behind this move. 

Important note: Don’t ignore strong trades like this one even if there is no confluent factor.

One major mistake that most traders make is that they confuse confluent factors for the criteria we use to evaluate the trading setup.

The criteria that we consider to evaluate a trading setup are more important than the confluent factors. 

The confluence factors give us more confirmations; they are not the primary reason for the trade.

So, if you find a high probability trading setup but can’t find a confluent factor, such as a Bollinger band or an RSI divergence, you can still take the trade. 


Conclusion

In this post, I have shown you a clear example of how to evaluate the bank breakout trap both on the trading timeframe and a higher timeframe.

You can learn more profitable trading strategies from our free Telegram channel where we interact and share knowledge freely. I also give out 2 to 3 free live Forex signals per week on the channel.

 

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