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Forex Breakout Trading

Forex breakout trading is one of the best ways to make money in currency trading and the reason why is that every big trend starts and continues from a breakout to a new high in a bullish market or new low in a bearish market. A Forex breakout strategy can be used by anyone, its very simple to do and can be very profitable. Lets take a look at Forex breakout trading in more detail.

What is Breakout Trading? 

Breakout trading simply consists of waiting for a break of a level of support or resistance on a chart and then a position is established in the direction of the break. All trends start from breakouts and continue from them but of course you have to be selective with the breakouts you trade because, not all breakouts follow through in the direction of the break.

With a little research and practice though its easy to do. Breakout trading is the best way to get into long term trends, while spending the least amount of time on your trading. A long term breakout trading strategy should take no longer  than 30 minutes a day, making it suitable for any trader.

Why Don't Most Traders Use Breakout Trading?

Most traders fail to try this type of trading because they want to buy the exact low or sell the exact high and predict when the market will turn but executing your trading signals in this way is doomed to failure because – you cannot predict Forex prices in advance. When a breakout occurs, the novice trader wants to wait for the pull back because - he has missed the start of the move and get in at a better price but  the best breakouts don't pull back, the trade accelerates away from the breakout point and the trader who waited never gets in on the trend.

The smart trader knows he may have missed the start of the move but knows, he has the odds on his side and goes with the break – he may have missed the start of the move but knows there is much more profit to come as the trade unfolds. This trader may not have sold the exact high or bought the exact low but he knows, that the way he has entered the trade puts the odds on his side and will allow him to get a big profit from the trend.

A Breakout Trading Strategy for Success

The key with breakout trading is to keep your system simple and robust and be very selective in terms of the breakouts you trade. Breakout trading is not about trading a lot, its about being selective and waiting for the best opportunities – so lets take a look at how to do this.

When selecting a trade the following criteria should be studied before you enter your trading signals:

The Number of Tests and Time Duration Between Them

As a general rule – the more times a support or resistance level has been tested the more valid the level is and also the period of time between the tests is also important. While you can trade a level which has just 2 tests we like 6 or more and we like at least 2 of these tests to be at least a month apart.

Volatility

When a breakout occurs you will generally want to see an increase in volatility and all the best breaks will see, a big up turn in volatility as fresh trades are opened on the break and stops are covered.

Momentum

The best breaks also tend to occur when momentum is not overbought or oversold. If the momentum indicators you look at are, be wary of trading the breakout because momentum may not be able to follow through.

The Sentiment of Traders

If most traders are not looking for a breakout and the news is say very bearish and a bullish break occurs this normally adds to the validity  of the break. The best trends and breakouts tend to come out of nowhere when the vast majority of traders don't expect them – so if no one agrees with the break, get on board, its likely to be a good one.

Stop Loss Protection

Stop loss protection is easy – just behind the level which has given way but make sure you give your stop a  bit of room ( in a long term trend 50 -100 pips) because very often on a breakout prices will dip back first, clip close stops and then accelerate away so don't but your stop to close, like the majority of losing traders do.

When in a trade get your stop as quickly as possible to your entry point and then, watch the trend unfold and trail your stop behind the market noise. If a breakout fails to follow through quickly, I.e within the day session consider just getting out the market – most good breakouts confirm themselves very quickly and if they stall chances are they could reverse, so don't wait for a stop to be hit – get out the market.

Free Breakout  Trading Systems

There are many free trading systems you can get which have made huge gains and two of the best are - the Turtle Trading Rules and Richard Donchian's 4 Week Rule, both of which you can find further details on this site. They have worked for over 30 years and will continue to work, as long as markets trend long term and that won't be changing any time soon.

Trading Breakouts A Strategy Anyone Can Use

Forex breakout trading is a method any Forex trader can use – its based on timeless and easy to understand logic and will never go out of date. Instead of trying to beat the market which most traders do, they should consider currency breakout trading which simply let's price action tell you what to do and will get you in on - all the best trends and profits

 
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