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Home » » Peeking into Breakout Trading Strategy by Kathy Lien

Peeking into Breakout Trading Strategy by Kathy Lien

In this review, successful trader Kathy Lien shares insights about her reliable breakout trading strategy, which employs the CCI indicator and specific techniques to secure profits. The potential gains from breakout trading can be enticing. However, many traders hesitate to use this strategy due to concerns about false breakout signals. Addressing this issue, Kathy Lien offers an intriguing solution by using the CCI indicator to identify genuine breakout opportunities from price momentum.

According to Lien, price momentum will continue if supported by strong momentum. The CCI indicator, essentially an oscillator, provides precise guidance for spotting potential true breakouts. Created by Donald Lambert, the CCI is bounded by the levels +100 and -100, typically interpreted as overbought and oversold thresholds. Interestingly, this breakout trading strategy does not adhere to these standard principles. Instead of viewing movements beyond +100 and -100 as overbought or oversold signals, Kathy Lien sees them as opportunities for entering breakout signals.

Guidelines for Kathy Lien's Breakout Trading Strategy

Before learning the entry and exit rules of this strategy, it's beneficial to understand these two key guidelines:

  1. Time Frame and CCI Setting

    • Use the H1 chart for short-term trading. For long-term strategies, the recommended time frame is D1.
    • The CCI indicator should be set with a period of 20.

  2. Closing Half of the Trade

    • A unique aspect of Kathy Lien's breakout trading strategy is the rule to close half of the trading position once some profit has been achieved. Closing half the trade means reducing the position size by half while the order is still running. For instance, if you open a position with a size of 1 lot, closing half of it will reduce the trading size to 0.5 lots.
    • This technique is crucial for securing profits already achieved. Kathy Lien advises securing profits when the price movement equals the stop loss (SL) size. Thus, if the price suddenly reverses and the SL is hit, the loss will be covered by the previously secured profit.

Trading Rules for Open Buy

  1. Observe when the CCI indicator last rose above the +100 level and note its value.
  2. When the CCI indicator again crosses the +100 level, compare its value with the previous rise. If higher, open a buy position at the closing price of that moment.
  3. Place the SL at the lowest price (low) at that moment.
  4. When the price increase equals the SL size, close half the trade and move the SL to the breakeven level.
  5. Use the breakeven level to calculate the profit target with a risk/reward ratio of 1:2.

Example of Open Buy

On the EUR/USD chart, price momentum rises sharply and crosses the +100 level in Step 1 with a CCI value of 130.00. In Step 2, the EUR/USD momentum increases again with a higher value of 162.61. The closing price at that moment is 1.1945, and the low is recorded at 1.1905. An entry buy is placed at the close level (1.1945), with the stop loss at the low level (1.1905). With a stop loss size of 40 pips (1.1945-1.1905), the price rises and reaches the 1.1985 level. After a 40-pip increase, half of the trade is closed, and the stop loss is moved to the breakeven level (1.1945). The profit target is measured 80 pips from the breakeven level, placing it at 1.2025.

Trading Rules for Open Sell

  1. Identify when the CCI indicator last fell below the -100 level and note the achieved value.
  2. When the CCI indicator crosses the -100 level again, compare its value with the previous fall. If lower, open a sell position at the closing price of that moment.
  3. Use the highest price (high) at that moment to place the stop loss (SL).
  4. If the price decline equals the SL size, close half the trade and move the SL to the breakeven level.
  5. Use the breakeven level to calculate the profit target with a risk/reward ratio of 1:2.

Example of Open Sell

On the EUR/JPY chart, the CCI indicator initially falls and crosses the -100 level with a value of -115.19. On the second decline, the CCI indicator records a value of -133.68, signaling a sell entry because it is lower than the first fall. The price closes at 140.79, so the entry is opened at that level. The stop loss (SL) is placed at the high level of 141.51. This results in an SL size of 72 pips (141.51 - 140.79). When the price continues to fall and finally reaches the 140.07 level (72 pips below the entry level), half of the trade size is closed, and the stop loss is moved to the breakeven level. The profit target is set by calculating twice the SL size (144 pips) from the breakeven level.

This breakout trading strategy allows traders to identify entry opportunities in the right direction. However, this trading setup will not be effective if you are not disciplined in using the stop loss according to the rules, explains Kathy Lien. The trader, who partners with Boris Schlossberg, emphasizes the importance of discipline in trading. While the breakout strategy using the CCI indicator may not always be accurate, disciplined use of the stop loss is key to success.

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