One of the most talked about forex trading techniques is breakout strategies, and for some good reasons too. Once you’ve mastered the techniques, you can easily carry them out, lower risk and get a high rate of success.
There are two kinds of breakout strategies – counter-trend signals and continuation in trending markets. Whatever strategy you choose, the breakout causes a powerful directional move.
Breakout: what exactly is it?
You may be wondering what a breakout actually is. It’s a powerful directional movement in price that surpasses a resistance level or support that previously held the price down. Breakouts that happen on a trend reversal tend to set up breakouts from slanted pattern assortments, like networks where prices had been restrained between two price levels.
If you look back at 2007/2008, you’ll notice an extended period of time with strong uptrend. However, the price took a rest and settled between two price levels. The price moved between the Euro 1.6 and 1.53 support area, bouncing against the support line at a minimum of three times and twice against the resistance line. The pattern is similar to the setup for a double top, providing a sign that a reversal trend was on the way.
The technique is ideal for all timeframes and on all currency pairs. In order for a breakout pattern to occur, there needs to be a strong downtrend or uptrend. An uptrend is distinct by a series of higher highs and higher lows. A downtrend occurs when there are lower highs and lower lows.
When the move has happened, the price rests and stays between the converging prices levels, marked by the trend lines. There are three steps you need to take for the setup:
- Draw trend lines that recognize the pattern, making sure they go around the resistance and support areas to come up with its pattern.
- Figure out the level for the potential breakout.
- Come up with an entry price and stop loss.
The characteristics listed below create a good setup:
- Resistance/support levels which has been tested a minimum of three times on both sides.
- Channel area was created over an extended period of time.
- The more times the price tries to go beyond the resistance/support area, the stronger the breakout move is going to be.
When a candle breaches, the support area becomes a full-bodied strong candle that closes under the support area. It then follows on its bearish candles and confirms the move.
Understand trade entry
When it comes to trade entry, there are two entry strategies:
- Put one sell order below the support and buy order above the resistance area. During this point, it’s not known if the breakout is going to happen, which is why orders need to be placed for both short and long-term.
- Put a sell order near the candle that’s breaking through the support area and a buy order if the price surpasses the resistance area.
Put a stop loss at the top where the support area is breached and under the candle where the resistance area has been breached.