Forex Trading Breakouts Strategies
Forex Trading Breakouts Strategies
Breakouts occur when price has been range-bound for a period of time as bulls and bears battle to dictate the direction of the trend. Breakouts can either represent a continuation of the trend, after a period of consolidation which results in the formation of a rectangle chart pattern or at the end of a move higher or lower as a reversal. They can be seen on most time frames and often result in price moving sharply higher or lower as either bulls or bears finally get the upper-hand.
Often, one of the first trading scenarios and potential trade setups that a trader is introduced to is the range breakout. This is possibly because a range is easy to spot and knowing when to enter is relatively easy – when the price moves outside the range. There are likely many reasons people trade range breakouts. One may be the belief that range breakouts can provide extraordinary returns as the tradable is launched out of its holding pattern.
Many breakout traders also use opportunities when the price breaks-out of any type of trading pattern. This can be a triangle, a head-and-shoulders pattern, a flag, a box channel as well as the more common support and resistance levels. This type of style seems counter-intuitive to a fundamental trader. A fundamentalist’s goal is to buy below fair value, and sell above. The idea of buying as the price makes new highs, or selling as it reaches new lows, as breakout trading does, goes against this viewpoint.
Breakout events are extremely common in forex charts. They also occur across different time frames. Nevertheless, having a good grasp of technical analysis is necessary to identify which of these are worth trading and which are best avoided. Technical indicators allow the breakout trader to judge how robust a given channel is and if a break attempt is likely to be successful or not. Most breakout traders use a combination of other inputs to form their decision. However, in the end, it often comes down to experience and gut instinct.