The best Forex breakout strategy is the one that gives you the best chance to profit. That means you have to look at bullish patterns and setups on charts. Then confirm that with an indicator like RSI or Stochastic indicator. Using support and resistance as a guide is going to be necessary. Is price breaking or rejecting off resistance? You can’t have a breakout if price can’t break resistance.
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What Is the Breakout Strategy in Forex?
A breakout occurs when the price of an asset breaks out and manages to close above or below the resistance and support levels in a channel. We’ve learned about the support and resistance levels in our previous tutorials. To wrap up, a support line can be identified by connecting the low points of an instrument price.
They’re identified as the low points if the price rebounded upwards right after touching them. By definition, the support line needs at least two points to be formed but having more than two points would be a further indication of the strength of the support line.
A support line can be horizontal or angled. The resistance lines are effectively the same as support lines the difference is that they are above the current price and act as a ceiling from which the price falls. Again resistance lines can be horizontal or angled.
In fact, you can even use the TTM Squeeze to help make quick trading decisions. Which is the best Forex breakout strategy for you. Anything that helps you make quick decisions is going to help you turn a profit.
How Breakouts Work
Support and resistance create a trading range so both lines keep the movement of the price within a certain range until the price makes a break either above or below.
Trading ranges are formed due to supply and demand and market psychology. When the price breaks out of the range it signals a change in the supply and demand and the beginning of an upward or downward trend.
Let’s say the price breaks out above the resistance level at this moment the resistance line might become a new support level and the supply and demand have shifted so most likely new levels of support and resistance will be established.
You can use the breakout strategy to trade Forex stocks or commodities and it works with any time frame. It’s a method of technical analysis that follows certain rules and can be applied universally.
So first you need to find a currency pair, stock, or commodity with a clearly defined support or resistance level. You only need one clearly defined support or resistance level to anticipate a breakout.
However, a trading range created by both the support and resistance level is more beneficial as you can take advantage of the breakout in either direction. So let’s see how you can enter the trade in the best Forex breakout strategy.
How Do You Use Breakout Strategy?
The best Forex breakout strategy is one that you’ve spent time researching and practicing. Because you know it’s going to work for you. There are quite a few ways to trade. But not every way works for every person. As a result, you have to go through some trial and error to find your match. There are several ways to trade breakouts depending on your trading style and risk tolerance. We’ll discuss them in detail. Let’s look at some of the approaches to enter and exit the breakouts.
Entry Approach
The first approach to enter is at the actual breakout. To trade at the actual breakout you’d need to devote more time to actually watching the market so that you can place a market order. Also, remember that whenever the breakout occurs this is the riskiest entry point; as the movement has not been confirmed. And there’s a high chance that the price will move back into the trading range. So you need to remain careful when trading break breakout with a market order.
The second way to trade a break is by using the pending orders that you’ll place above or below the resistance or support line. This would be a preset price level that will base on the current range and also confirmed by an indicator.
You can use any indicator such as a moving average, Bollinger Bands, or an oscillator like RSI or Stochastic. This style of trading breakouts would be more reliable since you’d be confirming the signals using other indicators as well; i.e the best Forex breakout strategy.
The third approach to trade a breakout is to wait for the candle on the timeframe you’ve selected to close above or below the range reaching a new high or a new low. This is one of the widely accepted methods among traders.
Because what happens in it is that not only do you have a breakout but you also confirm the breakout by having the next candle closed in the direction of the breakout. We suggest that you exercise patience in order to confirm the breakout. Having the candle close above the range is one of the strongest possible signals for a continued upward movement.
Exit Approach
Once you determine your entry point by using any of the above-mentioned approaches, you need to have your exit strategy in place. A good way to determine a reasonable target profit is to analyze the previous price movements of the asset.
Your exit strategy will largely depend on the specific trading circumstances, trading style, your expectations, and the risk to reward ratio. You also have to determine your stop loss for the trade. Make sure you don’t put your stop loss too far so that you don’t lose too much money if the market turns against you. But not too close so that small price fluctuations take you out of your trade too early.
One thing to look out for when trading breakouts is false breakouts. False breakouts occur when the price breaks past the support or resistance level but instead of continuing its movement, the price moves back into the previous trading range.
To avoid trading false breakouts it’s suggested that you wait to see if the price will continue to move in the intended direction. For instance, it’s good to wait for a new high before going long in this way you’ll sacrifice some of the momenta of the trend but you’ll ensure it’s going in the direction you anticipate.
Final Thoughts
Everyone wants a leg up on the competition. Especially in trading. The best Forex breakout strategy will have you getting the best entry. Therefore, you need to do you due diligence on what you should use for confirmation. Once you’ve mastered a strategy, you’ll be trading better than 90% of other traders. Pretty crazy right?
