If you’re a forex trader, you can attest that it’s not easy to make money in this market. The reason for this is simple – there are so many different strategies and trading systems out there, all claiming they will help you get rich quick! But how do we separate the wheat from the chaff? How do we find those few methods which really work? And what if I told you that one system could be used by anyone regardless of their experience or knowledge level? That would sound too good to be true right? Well, the forex breakout strategy is exactly like that… It works with no prior knowledge required whatsoever. All you have to do is follow these steps and your profits will skyrocket overnight. So let’s learn more about this strategy.
What Is A Forex Breakout Strategy?
A breakout strategy is simply an entry point into the markets based on price action alone. This means that instead of looking at charts, technical indicators, news events, etc., you only look at prices themselves. If the price breaks through some resistance levels then you enter long positions. Conversely, if the price drops below support levels, you exit short positions. Simple as that.
So why should you use such a method? Because it has been proven time after time that when using a breakout strategy, traders who stick to it consistently outperform other traders who don’t. Why? Because most people tend to trade off chart patterns and trends rather than just following price movements. They also tend to overtrade because they lack discipline. By contrast, a breakout strategy allows us to take advantage of price moves without having to worry about any underlying factors affecting them. In fact, even though the breakout itself may occur due to external forces, once the move has begun, our job is done. We sit back and watch the profit roll in.
So What Are Some Of These Strategies?
There are literally hundreds of breakout strategies available today. However, here are the five you’ll ever need.
1. Support
This is probably the simplest type of breakout strategy. Simply buy when the price reaches a certain level and sell when it falls below another level. For example, say you want to open a position when the EUR/USD crosses above 1.3500. Then you wait until the currency hits 1.3450 before entering the position. Similarly, if you wanted to close the position when the pair touches 1.3300, you’d wait until it reached 1.3250 before closing the position.
2. Resistance
To execute this strategy, you first identify where the current trend line lies. Once you’ve identified this, you place stop-loss orders on either side of the trendline. When the price breaches the upper limit of the range, you go long; conversely, when the price fails to breach the lower limit of the range you go short.
3. Trend Line Breaching
Here’s yet another variation on the theme. Instead of waiting for the price to reach a specific level, you set up two targets and wait for the price to hit both simultaneously. As soon as the price does, you start buying and selling accordingly.
4. Breakout
As its name suggests, this is perhaps the most popular form of breakout strategy. Here, you wait for the price to cross some predetermined level and then immediately begin taking trades.
5. Retest
Finally, there’s retracement trading. The idea behind this one is simple – we wait for the market to fall by a given amount and then try to catch it falling again. If we’re successful, we can make money from the initial drop. But if not, we have nothing to lose so we keep trying.
How Do I Use Them?
Now let me show you how these work in practice…
Example 1
Let’s assume that you want to open a long position with your forex broker when the USD/JPY rises above 100.30. So what do you do? Well, you first check which way the currency is trending. It appears to be rising but it could easily reverse direction. To find out whether or not it will continue to rise, you need to see if it makes new highs. That’s exactly what happens next. After hitting 101.20, the pair continues higher towards 102.10. At this point, you decide to enter the position. Now all you have to do is monitor the progress of the pair. Whenever it breaks through 102.15, you simply exit the position. This is known as an ‘exit strategy.
Example 2
You want to open a short position against the GBP/AUD exchange rate whenever it drops below 0.6500. Again, you look at the charts to determine whether the pair is likely to remain under pressure or recover. In this case, the pair has been dropping steadily since reaching 0.6480. However, it hasn’t fallen any further than 0.6340. Therefore, you think it might bounce back upwards. To confirm this, take a closer look at the chart. Sure enough, after breaking down below 0.6390, the pair bounces right back up. From here, you get into the trade. Just like Example 1, you’ll use an ‘entry’ strategy.
Example 3
A third scenario involves using a combination of entry and exit strategies. Let’s say you want to open positions when the AUD/NZD crosses above 0.7000. First, you look at the chart to establish whether the pair is currently overbought or oversold. Based on the indicators, it looks pretty good. Next, you plot support and resistance levels. These are shown in red and blue respectively. Finally, you draw a horizontal line between them. This represents the potential breakpoint. When the pair reaches this level, you close the position. Then, once the pair falls back below 0.6950, you reenter the position.
Conclusion
So now you’ve seen three different ways of executing a breakout strategy, which method would you choose? There really isn’t much difference between them. They each involve looking at the current trend before deciding where to place orders. Once they arrive, however, the differences become more apparent.