When done right, breakout trading offers very good short-term gains for Forex traders. In this blog post, we will examine what breakout trading means and how to trade breakouts in Forex successfully in the short run.
A breakout is a period of major, active price fluctuation in the market for a commodity. The movement can be positive or negative and generally goes on in one direction before being checked.
The breakout trading system is carried out by active traders in the market who are monitoring prices closely. The trader takes a position during the trend’s early stage that depends on the expected movement and makes the concluding trade at some point to make again.
Taking the right position at the initial stage and then making a reverse trade at the end of the breakout cycle results in the most gains. Generally, traders operate somewhere between the start and end of the breakout movement as no one can predict the cycle with 100% efficiency.
Identifying and Using Breakout Trading Indicators
Breakouts can be identified on price charts as a flag, triangle or head-and-shoulders pattern. During these movements, volatility gets lower and lower and prices appear to stabilize. A breakout occurs when the prices move up or down at the end of the pattern, outside the regular fluctuating cycle.
Successful Forex traders consider the currency’s underlying support and resistance levels when selecting a breakout trading strategy in Forex. Resistance is the upper level that the currency price touches before falling back. It is the threshold level for strong selling pressure.
Support is the lower limit where the currency price bounces back and signifies strong buying pressure at that level.
Bullish and Bearish Breakout Entry Points
When the price breaks out of the upper resistance, it is considered a bullish breakout. This signifies that there are more buyers than sellers in the market. Breakout traders attempt to capitalize on these by buying just above the resistance level.
On the other hand, if the price breaks out under the threshold level, it is a sign of bearish breakout and traders short sell just under the support level to take advantage of the falling prices.
Planning Exits for Intraday Breakout Trading Strategy
The second component of the breakout is to make a reverse trade to exit the price fluctuation. There are two exit points that the trader can use.
The first is to look at the point movement during the fluctuating cycle. If the currency price moves up and down within a 3-point range, then the exit point should be about 3 points from the breakout. If the trend is indeed a breakout and not a false breakout than this will end in a profitable forex breakout strategy.
The second exit is used if the trader failed to read the market correctly and the breakout appears to have failed. In a bullish breakout, the previous resistance level should now act as the support as there are more buyers than sellers at this point. However, if the price falls back into the previous range, it shows a lack of support and the trader should exit as quickly as possible to cut losses short.
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