1. Breakout System Strategy

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In this chapter we will actually develop our own system trade strategy. Here, we will develop a breakout system. 

Breakout system trades under the following basic rules:  

  • If a price exceeds the maximum value of a certain period, then it is assumed that an upward trend is formed. 
    → Short positions are settled and long positions are taken.
  • If a price exceeds the minimum value of a certain period, then it is assumed that a downward trend is formed. 
    → Long positions are settled and short positions are taken

The chart below shows the stock for USDJPY in some random day, in 5 minute increments


Assume that the red area is the certain "time period" for the breakout system. 
34 x 5 yields about 170 minutes. 
Of course, the red area moves to the right as the chart moves on. 

Now, imagine a moment at which the red area reaches the spot marked ①. The lowest value at that point is marked with a yellow line. The USD price at point ① "breakout" of the lowest value within the red area (i.e. the yellow line). 

Traditional breakout system judges this moment as the formation of a downward trend, and takes a short position towards USDJPY at this point. In another words, every long positions held are settled and makes new market orders for short positions. 

We will actually make the program that can do this in the next chapter!