Breakout Forex Trading Strategies are a highly speculative trading method that aim to position a trade in the early stages. It is done on the assumption that one is establishing a position at or near the starting point of an anticipated major price movement. It is called breakout because it occurs after the currency price breaches through and remains above a previously defined major price resistance or support. It is usually accompanied by an increase in trading volume and volatility index. Such a price movement usually occurs following the release of major economic data.
As the market absorbs the new economic data, the currency prices adjust accordingly and a sharp surge in volatility ensues. The currency prices may breakout upwards through the resistance or downwards through the support. In either case, the trader is prepared to take advantage of the opportunity by placing two entry orders - a BUY order just a few pips beyond the resistance and a SELL order just a few pips below the support.
Breakouts are a common occurrence in the Forex market. But you can expect more explosive price movements if the breakout is coming from such price patterns as a channel or from consolidation patterns like a flag, a triangle, or a head and shoulder pattern.
People consider this a very speculative trading strategy since the price can move in either direction after the data is released. It may initially go in the direction dictated by the data but may suddenly make a sharp turn around to resume its original direction resulting into whipsaw losses. To avoid such, protective stops must be placed about 15 to 20 pips above the entry point if you have a SELL position or 15 to 20 pips below the entry point if it was your BUY order which was initially triggered. This way, you will be able to minimize your losses in case the currency price makes a whipsaw movement!
You need to be wary of sudden price reversals while employing Breakout Forex Trading Strategies because you are using this in a very volatile market where it is deemed to be most effective. You must be able to recognize and accept when your trade or anticipated price pattern has failed. To be more objective, it is recommended to use pivot points in combination with the breakout strategies. The hourly pivot points would be most effective in this instance. The hourly pivot points calculate and projects up to 5 tiers of resistances and supports based on the previous hour's price movement on the hourly chart. The resulting resistances and support will now help you to objectively determine price targets, stop loss points and exit strategy.
If your stop loss point or trailing stop has not been triggered that means you are still in the market making money. It is then advisable to exit your trade on market close. It is never advisable to leave open positions in a very volatile market.
Followed to the letter, Breakout Forex Trading Strategies offer great returns and manageable risks when executed properly.
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