FOREX STRATEGY: BREAKOUT TRADING STRATEGY PART 1
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The breakout strategy is a trading strategy which positions are taken when the price by a resistance or support level around breaks. There are many different breakout strategies and they are used on all financial markets including the foreign exchange market (or the forex market).
The breakout strategy is very popular among novice Forex traders because it logically fits together (and thus easy to understand) and easy to perform. The basic idea is to adjust the position to be taken at the time when the price is performed outside the channel in which he is moved so far inside. A well-known technical indicator that is often used for the breakout strategy is the Bollinger Bands. When the price is the upper or lower Bollinger band breaks that seen as an increased chance that there is a breakout.
The breakout strategy in its simplest form places the trader a buy stop or sell stop, respectively, above the resistance or below support level. A buy stop is an order for a long position which is only opened at the moment that a given value is touched. Sell order is similar, but as a short position which opens when a certain price is hit.
Example of a breakout strategy: The currency pair EUR / USD has in recent days in a range between 1.4300 and 1.4500 waved on the Forex. The show is an important resistance level 1.4500 and 1.4300 an important support level. The forex trader now places a buy stop order on a sell stop at 1.4505 and 1.4295. This means that if the price breaks the 1.4500 and 1.4505 touches, a long position is opened that can benefit fully from the breakout upwards. Same for when price breaks down through the 1.4300 and 1.4295 becomes, in which case a short position would thus be opened to take advantage of the break-down.
Types of Breakouts
There are two types of breakouts, the breakout continuation and reversal breakout.
Continuation breakout: this is when the price again moving in the direction it was moving before a period of consolidation occurred. Think of a temporary range trade while buyers and sellers close their positions and try to remember which way the price will move.
Reversal Breakout: This is the kind of breakout that a trend reversal in motion, or the price breaks the previous trend and start trending in the opposite direction. This is usually put in motion by fundamental causes.
Logically, the reversal breakout rarer than the continuation breakout, simply because trend reversals less frequently than the continuation of a trend.
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Breakout strategies come in all shapes and sizes. An intra-day trader can just as well use a breakout strategy as a long term trader, forex that takes positions for months or even years.
It is but for the price of the currency pair the range within which he moved in a certain period, has left. To determine the range you should look for resistance and support levels which the price moves. There are several ways to understand resistance and support levels (scour online resources, or even calculate, for example, to calculate fibonacci levels. What are fibonacci levels) but the simplest way to calculate resistance and support, everyone can do.
You pick a forex chart, for example, a chart of the EUR / USD, with 15 minute candles. This is a graph for every 15 minutes, a candle is published. (More about candlestick charts). Check out over a period of 4 hours what was and what the high low, and whether these levels are approached several times (ie, whether the price of the grades were established between these levels). If so, you could say that the short-term resistance and support levels are formed by the respective high and low. Be it high when the low is broken, there is an intra-day breakout.
Why the forex breakout strategy is not the holy grail that every forex trader asleep rich? More about that in Forex Strategy: Breakout Trading Strategy Part 2
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