Simple Breakout Forex Trading Strategy

Simple Breakout Forex Trading Strategy

Submitted by adil on Tue, 01/28/2014 - 14:38

The main purpose of a breakout strategy in Forex trading is to capture an early price movement when it starts consolidating itself in market direction or a trend for the trading day. A break out strategy is actually one of the most effective methods for trading short term moves. Following lines contain some tips to trade breakouts and how to place accurate entries to maximize the advantages of short term Forex moves.

Take an example of USD/CHF currency pair that is supposedly a good candidate for employing breakout strategy this week. Observe the following chart before going through the example.

The chart clearly indicates that currency pair has consistently been forming a series of lower lows throughout the last week. Furthermore, it has also declined 238 pips through yesterday’s low that is .89234. This downward price momentum will excite traders looking for breakout entries to take maximum advantage of the situation especially if the USD/CHF pair moves to lower lows.

As price moves to lower lows in strong downtrend like in the case of USD/CHF, trader will look for opportunities to sell the breakouts. Traders can also identify support as a point where currency pair is sustained on the chart or a price floor. In this regard, Forex breakout strategy is especially beneficial for scalpers who want to trade breakouts. Such traders are recommended to turn abovementioned chart into a 30 minutes chart to find these levels. The best method to find support is to use a trend line and connect a series of lows with each other. Rest becomes pretty simply as traders place traders after price breaks through the declared pricing level.

Use of entry orders is perhaps the easiest way to trade breakouts. It is important to place an entry under support which itself is present below the previous low on the chart. In this case, the entry orders will help traders in preventing execution whenever price breaks through the support. Now take a look at the following graph.

It is evident from the chart that USD/CHF currency pair began moving through previous day’s daily low of .89356 that is the previously established line of support. Now the traders will place entry orders under this price in the hope that the price will continue to decline and move towards lower lows.

Many veteran traders believe that breakouts are the best strategy to trade short term entries for Forex. However, short and false breakouts are also a reality and will occur from time to time. Therefore, traders should always place stop orders at appropriate points in order to prepare themselves against unexpected price movement.

For placing stop order to prevent damage caused by false breakouts, traders usually consider previous support level as next resistance level. Traders normally place stop losses above these levels which excites all sell based positions in case the price attempts to move towards higher highs after breaking through the support or resistance.

Finally, the methodology to take profits through breakouts is similar as in the case of other methods. That is, you take as much as 3 times profit than the price you originally risked. Similarly, set your profit target within the previous bottom (swing low point) or previous peak (swing high point) for buying or selling respectively.