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The break-in strategy

Description

The Break-in strategy is a simple day trading strategy. Signals are fairly rare, about two per week. The trading strategy was designed and is used by a well-known trader and trader coach, Uwe Wagner. Uwe Wagner uses this strategy to trade de DAX 30 market index. Conceptually it can also be used to trade other market indices.

These are advantages of the Break-in strategy:

  1. Developed by a well-known trader.
  2. Simple and easy to understand
  3. Made for the DAX but can be used on other indices.
Suitable for : Market indices (DAX, DOW, CAC…)
Instruments : Futures and CFDs
Trading type : Daytrading
Trading tempo : 1-2 signals per week
Using NanoTrader : Manual or (semi-)automatic
 

The strategy in detail

Break-in, as opposed to the traditional break-out, refers to the fact that Uwe Wagner expects the market to drop when there is a very strong opening or, to go up, when a very weak opening occurs. So, what is this trader’s definition of a very strong opening and a very weak opening?  A strong opening is an opening above the previous day’s highest price. A weak opening is an opening below the previous day’s lowest price.

If the market price drops below the previous day’s highest price, a short sell position is opened. If a weak opening occurs and the market price climbs above the previous day’s lowest price, a long position is bought.

When to open a position?

As usual the devil is in the details. Uwe Wagner defines the core trading hours i.e. the hours which are relevant to determine the previous day’s high (low) as 9h00 – 17h30. He therefore needs to filter out al prices outside these hours. The unique “Discard Price Data” filter in the NanoTrader allows Uwe Wagner to do this. The filter allows the trader to specify, which time periods need to be removed from the chart.

In the case of the Break-in strategy on the DAX index Uwe Wagner discards the time blocks 0h00 – 8h59 and 17h30 – 23h59:

Uwe Wagner strategy

Users can change these times for other instruments if needed.

Once NanoTrader detects that the market opens above (below) the previous day’s high (low) a horizontal trigger line is plotted in the chart. This trigger line corresponds to the previous day’s high (low) for the time period specified by using the filter.

A long position is opened at the market price if the market crosses above the long trigger level. A short position is opened at that market price if the market crosses below the short trigger level.

This example shows a buy signal. It is a weak opening. The market opened well below the lowest price of the previous day. The NanoTrader draws a blue trigger line at this price level. The market goes up and crosses the trigger line. A long position is bought at the market price. This is indicated by the green triangle and green vertical bar.

Uwe Wagner strategy

This example shows a short sell signal. It is a strong opening. The market opened well above the highest price of the previous day. The NanoTrader draws a blue trigger line at this price level. The market goes down and crosses the trigger line. A short sell position is sold at the market price. This is indicated by the red triangle and red vertical bar.

Uwe Wagner strategy

When to close a position?

The Break-in strategy uses a profit target and a stop loss to protect the position. The profit target is placed with a distance of 30 points. The stop loss is placed with a distance of 25 points.

The flat filter will automatically close the position at the market price at the end of the day, if neither the profit target nor the stop loss is reached.

This example shows a buy signal after a weak market opening. The stop loss (red line) and the profit target (green line) are put in place. After a sideways period, the market price went up and reaches the target. The position was closed with a profit.

Uwe Wagner strategy

The Break-in strategy is somewhat non-conventional. Firstly, the strategy buys after a very weak opening. Traditional practice would be to go with the trend. Secondly, the strategy works with a fairly low return-risk ratio (RRR) of 1,2 (30/25). Nevertheless, in a back-test the strategy appears to perform well.

Uwe Wagner strategy

Practical implementation

Using the NanoTrader follow these steps:

  • Open the chart of the instrument you want to trade.
  • Select the template study "WHS Break-in” in the "WHS Strategies" folder.
  • If required, adapt any parameters as described above.If you trade other indices, change the filter, the stop, the target and the flat filter.
  • For semi-automated trading, activate TradeGuard+AutoOrder in the chart. For automated trading, activate AutoOrder in the chart.