🏔️How to Master Breakout Trading Strategy (with 12 great examples)

Using the 2 Hills and 2 Valleys Technique

I like mastering the Trading Breakout Strategy using the ‘2 Hills & 2 Valleys‘ method. Identifying them when you see them on the chart is quite straightforward. Let me go through how to identify them step by step.

These bullish and bearish patterns appear in most asset classes, such as Forex, Cryptocurrencies, Stocks, Commodities, and more, and in most time frames.

We recommend using a 4H or Daily timeframe for the best results. Now, let’s get on with the tutorial series.

Difficulty: 6/10

In the first example, we will start with the Bearish Breakout Setup and show you examples of the most common scenarios.

‘2 Hills‘ 📉 Bearish Trading Breakout Strategy

There are five main steps to this strategy.

1. Look for the ‘m’ shape.
2. Draw your trendline across point A and point B.
3. Wait for the ‘Trigger’ candlestick to appear.
4. Create your trading plan and execute it.

Step 1. Look for the ‘m’ shape.

To make things simpler, think of a hill like the image below.

This pattern may be observed in many charts, depending on market conditions.

You’re going to notice this ‘m‘ pattern or shape.

The ‘m’ shape is defined by its large internal space. In this diagram, you can label it as ‘hill 1’ followed by ‘hill 2’.

‘m’ shape example 2

‘m’ shape example 3

In this example, you’ll see the chart of the EUR/JPY pair. Can you spot the ‘m’ shapes?

Now, can you see it better?

Great, now’s an example of Apple stock. Can you identify where the ‘m’ shapes are with just a glance? Here’s a large ‘m’ shape for Apple stock.

The interesting thing about this strategy is that you can find smaller ‘m’ shapes within the larger ‘m’ shapes, such as this: smaller ‘m’s in yellow and larger ‘m’ shapes in blue.

We call these major and minor patterns. Minor patterns exist within larger patterns.

You’ll learn shortly on why these minor patterns are important as well.

Let us show you another example using Google (GOOG) stock chart. At times you’ll sometimes find multiple ‘m’ shapes!

Here’s an example of the GBP/USD chart with a nicely defined ‘m’ shape.

You can also see how this ‘m’ shape appears twice in the EUR/USD pair.

Lastly, this also appears in the USD/JPY pair.

As you can see, ‘m’ shapes are everywhere! Your ideal ‘m’ shape should have a large internal space. This is important!

Step 2. Identify the two ‘Swing Lows’ in your m shape.

The next step is to draw a trendline. A trendline is a line connecting two major swing points on a chart.

Let me show you an example.

In this example, the’ low’ point is a swing point. You should look for 2 ‘low’ points in the chart.

Step 3. Drawing a trendline to connect the two swing lows.

Next, you want to use your trading software to draw a trend that connects the two ‘low’ swing points at the very tip (in this case, the very low of the candlestick).

Pull and drag your trendline tool across once you have connected the 2nd swing point.

GBP/USD Example In this example for the Pound/USD pair, you will see how I’ve first identified the 2 ‘Hills’ or ‘m’ shape.

I will then draw a trendline connecting both swing lows. And drag my trendline across the chart.

Here are some examples of ‘minor’ breakout strategies within the same GBP/USD chart.

You MUST remember some conditions and information when drawing trendlines for a Bearish Breakout. Please remember these rules!

An example of a trendline Apple’s stock chart.

🚨 Bearish Trendlines Rules and Conditions

1. Your trendline (point A) must always be lower than the 2nd point (point B).
2. Your trendline must start from the swing low point A and swing low point B.
3. It would be best to have an ideal ‘2 Hills’ or ‘m’ shape clearly defined as a ‘m’ shape.

Let’s go through some examples!

You will notice that point A is always lower than point B in the diagrams above.

Avoid these common mistakes!

Now, let’s use real charts to see what this looks like.

Step 4. Wait for the ‘Trigger’⚡ candlestick for the 📉Bearish Breakout setup.

The ‘trigger’ is a Candlestick that appears below the trendline.

This is a “Trigger” or “Confirmation.” It should not “touch” the Trendline. It should ideally open and close below the trendline. It does not matter if it’s a Bullish Candlestick, Bearish Candlestick, Doji, etc. It should be very obvious! Once you see it, you can take it as a reason to open a Bearish Entry order.

Bearish Breakout Example Concept

Bearish Breakout – Sell Setup with Confirmation Candlestick for GBP/USD

Bearish Breakout – Sell Setup with Confirmation Candlestick for Apple (APPL)

Bearish Breakout Example for minor breakout sells in Apple (APPL)

Example of minor sell setups for Apple (APPL).

In this example, you can see 2 minor bearish setups (in yellow) within a larger setup (Hill 1 and Hill 2 in blue)

Step 5. Create your trading plan for your Entry, Stop Loss and Take Profit for your Bearish Breakout Sell Setup.📝

Now that you’ve learnt how to identify and prepare for this setup, you must understand how to place your entry, stop loss and take profit levels.

Once you have identified the setup, here are the steps to see if you have a good plan.

1. Make sure you’re following the more significant trend direction.
2. Place your stop loss above the most recent swing point high.
3. Place your Sell Position once you see a confirmation candlestick.
4. Your take-profit level should be at the next support zone.
5. Your risk to reward should be equal to or more than 1:2.

Make sure you’re following the bigger trend direction.

If you are watching the 4H charts for a Bearish Breakout, check the daily timeframe to see that you’re in a bearish📉 trend. If you’re watching the H1 chart, check that the 4H timeframe is also bearish.

Ideally, both Daily and 4H Trends should be aligned with each other (bearish).

⚠️Your take-profit level should be at the next major support zone

⚠️ Your risk to reward should be equal to or more than 1:2

Let’s compare real-life examples of gold, bitcoin, Tesla, EUR/USD, and GBP/JPY.

Gold 4H Bearish Breakout Example

USD/JPY 4H Bearish Breakout Example

USD/CHF 4H Bearish Breakout Example

Ethereum 4H Bearish Breakout Example

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Now that we’ve discussed the principles behind the 📉Bearish Breakout Strategy let’s explore the Bullish Breakout strategy. Please remember that these are not guaranteed methods but strategies that require careful consideration and are subject to market risks.

This is where the “2 Valleys” Bullish Breakout strategy comes in!

Similar to the Bearish Breakout Setups… 

Just the opposite way around.

‘2 Valleys’ 📈Bullish Breakout Strategy

There are 3 main steps to this strategy, similar to the bearish setup as mentioned.

1. Look for the ‘w’ shape.
2. Draw your trendline.
3. Wait for the Bullish ‘Trigger’.

Before we get into the candlestick chart, be sure you understand the general shape of a ‘w’ valley.

The examples should look like this.

Step 1. Look for the “w” shape.

Example ‘w’ outline shape 1

There should be large internal space in the formation.

Example ‘w’ outline shape 2

Example ‘w’ outline shape 3

Example ‘w’ candlestick example for EUR/USD

Example ‘w’ candlestick example for AUD/USD

Step 2. Identify the two ‘Swing Highs’ in your w shape.

You can easily see the two swing highs in this outline diagram in this example.

These are also considered swing points, where the price turns.

Now, moving to a real-life example chart of the GBP/AUD, this is what it looks like.

Now, another example using the GBP/AUD chart

Step 3. Drawing a trendline to connect the swing highs.

The next step is to draw a Breakout Bullish trendline. A trendline is a line connecting two major swing points on a chart.

In this example, the ‘high’ point is a swing point. You should look for 2 high swing points in the chart and connect the 2 points to form the breakout bullish trendline.

Drawing a trendline for EUR/USD. Start by connecting 2 swing highs and pulling it across.

And lastly, an example from GBP/AUD

Conditions of the “2 Valleys” Breakout Bullish Setup

1. The Trendline’s Point B must be lower than Point A.
2. You start the trendline for each ‘high’ of the valley – also known as the SWING point.

Here are some outline examples of what your trendline must look like.

Step 4. Wait for the “Trigger” candlestick to appear for the Bullish Setup.

Working with a larger trend in play will give you higher odds of success in your bullish entry.

Like the “2 Hills” Bearish Breakout setup, wait for a candlestick that appears above the trendline.

This is a Confirmation candlestick.

It should not “touch” the Trendline. And it does not matter if it’s a Bullish Candlestick, Bearish Candlestick, Doji, etc.

It should be very obvious! Once you see it, you can take it as a reason to open a bullish entry.

Now, we used the EUR/USD chart to demonstrate this.

This also happened on the AUD/USD chart.

As well as the GBP/AUD pair.

Step 5. Create your trading plan for your Entry, Stop Loss and Take Profit for your Bullish Breakout Strategy.📝

Like the Bearish Setup, the Bullish Setup is simply the inverse.

Once you have identified the Bullish setup, here are the steps to see if you have a good setup.

1. Follow the major trend!
2. Place your stop loss below the most recent low.
3. Your take-profit level should be at the next resistance zone.
4. Your risk to reward should be equal to or more than 1:2.

Let’s detail each step out.

Follow the major trend!🕒

If you are watching the 4H charts for a breakout, check the daily timeframe to see that you’re in a bullish📈 trend. Ideally, you want the two higher timeframes to align with you before you enter a bullish setup.

Place your stop loss❌ below the most recent low point

Your take-profit level should be at the next major resistance zone

Your risk to reward should be equal to or more than 1:2

Let’s review some real-life examples of Gold, bitcoin, Tesla, EUR/USD, and GBP/JPY.

Gold Daily Chart

Bitcoin (BTC) Example

Tesla (TSLA) Example

EUR/USD Example

GBP/JPY – Double Bullish Breakouts in 1H Timeframe

✅For the first breakout bullish trade setup, you can choose to close your bullish entry trade at the nearest resistance zone, around 192.70.

You can see both major and minor setups playing out accordingly.

⚠️Important Tips to Remember!

Large Timeframes are more effective (4H setups and higher)

Breakout Shape Matters – large internal spacing Between Hills and Valleys Is Key to spotting a good breakout play. Very tight ‘w’ and ‘m’ shapes are usually continuation moves in the same trend.

My Personal Favourites are the 4H time frame and Daily Timeframe.

Practice HELPS! It would be best to practice this setup first in a simulator or demo account.

Prepare your trade plan and stick to it. Having a good risk-to-reward ratio (at least 1:2) helps stay profitable in the long term. Be patient to allow the setup to play out over time.

Useful Resources

Practice this strategy thoroughly without risk first. Start by identifying the shapes, drawing trendlines and drawing with simulated trades. Do this at least 50 times if you want to get familiar with the setup for both buy and sell setups. Continue to practice more if you want to attain mastery.

TradingView.com

MetaTrader

ThinkOrSwim

Investopedia Simulator

Once you become familiar with the trading breakout strategy and setup, we strongly recommend using a backtesting simulator like Forex Tester to dial in your strategy and setup.

We highly recommend using Forex Tester to test your trading strategies because it provides a realistic and risk-free environment to practice and refine your skills. With access to extensive historical data, you can simulate real market conditions and see how your strategies would have performed in different scenarios.

This helps you identify strengths and weaknesses in your approach, allowing you to make necessary adjustments without risking real money. Forex Tester accelerates your learning curve and enhances your confidence in trading, making it an invaluable tool for beginners and seasoned traders.

Forex Tester is a specialized software designed for backtesting and practising forex and other price action trading strategies in a realistic trading environment. This software is highly beneficial for beginners and advanced traders who want to refine their skills and strategies without risking real money.

Key Features:

• Realistic Simulation: Simulates real market conditions with historical data to provide an authentic trading experience.
• Extensive Historical Data: Access to years of historical data to test various market scenarios.
• Advanced Charting Tools: Includes trendlines, indicators, and drawing tools to analyze setups in detail.
• Customizable Strategies: You can create, test, and refine custom trading strategies.
• Detailed Reporting: Generates comprehensive reports on trading performance to help identify strengths and weaknesses.

Benefits of Using Forex Tester:

1. Risk-Free Practice: Allows traders to practice and refine their strategies without risking real capital, making it an excellent learning tool for beginners.
2. Improved Strategy Development: Enables thorough backtesting of trading strategies against historical data, helping traders understand how their strategies would have performed in different market conditions.
3. Enhanced Learning Curve: This curve provides an opportunity to learn and practice trading in a controlled environment, accelerating the learning process.
4. Time Efficiency: Allows traders to fast-forward through time, compressing years of market data into a shorter period, making it easier to test long-term strategies.
5. Performance Analysis: Offers detailed performance metrics and reports, helping traders to evaluate and improve their strategies effectively.

Final Thoughts

Mastering a trading strategy like the breakout strategy using the 2 Hills and 2 Valley technique takes dedication and practice. By leveraging tools like Forex Tester, you can practice your setups in a risk-free environment, refine your techniques, and build confidence before trading with real capital.

Combining theoretical knowledge with practical application through backtesting is crucial to developing a robust trading strategy. Stay committed, keep learning, and use these resources to enhance your trading journey. Success in trading comes with persistence, practice, and a willingness to learn from successes and mistakes. Happy trading!

Frequently Asked Questions (FAQ) for the ‘2 Hills & 2 Valleys’ Trading Strategy