BPC- It Comes In Three Phases
The BPC trading strategy is probably the oldest and consistent technical trading strategy. It is universally recognised by all technical traders (i.e. those who observe technical analysis). It’s very easy to identify and works very well with other trading indicators and setups (Fibonacci retracements, volume indicators, Moving Averages etc.). We will go through a BPC (breakout, pullback & continuation) setups historically and show how to apply it to your trading.
Many traders take full advantage of all three stages of a BPC trade. The safest part of the three phases and the one unanimously agreed upon as the best point of entry is the continuation leg of the BPC strategy. However, if you get used to spotting and applying this strategy in conjunction with other analysis tools you can profit from all three legs of the strategy. We will only cover the breakout phase of the strategy in this particular article.
Spotting the Breakout
There is a large misconception around understanding on how to spot a trendline. Trendlines are essentially support or resistance lines. When we think of support and resistance lines we normally visualise straight horizontal lines. According Dailyfx, “a trendline is a line connecting two or more lows or two or more highs with the line extended into the future”. A trendline must been drawn from the tip of shadow/wick (these are high and low of points of candlesticks).
In terms of spotting a breakout, there should be at least three points where prices touches to the trendline. The rule is three touches of resistance and three touches of support (then anticipate the break out).
The above shows an example of a Euro/Japanese Yen (EURJPY) currency pair chart. The example is shown on the Daily Time Frame Chart. BPC strategy is applicable to all timeframes but due clarity and understanding when daily price closes above the trendline then its most likely a given that resistance (shown above) or support line has been broken anticipating a pullback in price.
Please note there is more emphasis given to breakout strategies on the Daily Time Chart because it’s important to see a candlestick price close above the trendline and this is a confirmation the BPC strategy is in play. On a tradingview chart you can see the close price at the top of chart window where it states OHLC (please remember to hover over the breakout candlestick). The chart shows a large Bullish Candlestick breaking the downward bearish trendline.
Now what tends to happen sometimes is that you might get a spike and then see the bullish candlestick but as the pressure of bears (sellers) takeover for the rest of the day, the candlestick then closes below the trendline. If this happens then it is not classed as a valid breakout. It’s a MUST that there is a clear close of candlestick above the trendline.
Closing Price Above Trendline
Viewing the Breakout on a daily chart frame is just a confirmation that a potential BPC is in play. As mentioned before majority of traders wait for price to pullback to the trendline and then execute a trade on the continuation. Below is another example of EURUSD breakout shown on the Daily Chart Time Frame. It’d not always a given that the trendline has to have three touches and then breakout. Here there are four instances where price rebounded on the sloping descending trendline. That being said, we look for a daily close price where the body of the candlestick is above the trendline.