Breakout Forex Trading Strategy
There are a number of different phenomena in forex trading. One of those is known as a breakout. According to Investopedia, a breakout is basically a security’s price movement through a known level of resistance that is typically followed by an increased amount of volatility and heavy volume. Or in other words, it is when the currency pair’s price goes outside of its known resistance or support level with an increased volume.
The underlying asset is bought by traders when the price goes above (breaks) a level of resistance or when it goes below (breaks) a level of support. A typical breakout forex trader will place a long position if the currency pair’s price goes above (breaks) resistance levels or place a short position if the currency goes below (breaks) support. After being traded beyond the known price barrier, there’s an increase and volatility and the prices for that currency pair typically head in the breakout’s direction. Breakouts are a major indicator of future price trends.
But how does a forex trader trade using breakouts?
While you are able to use volume to trade futures or stocks, you cannot use it to trade forex. While this leaves you at a disadvantage, you have to ensure that you do your best to mitigate risk and prepare yourself for to take full advantage of a good breakout.
When trading breakouts in the forex market, instead of using volume, you focus on volatility. If you notice a major price movement within a short time frame then you know that volatility is high. However, if you notice that there is minor price movement within that time frame then volatility is low.
Many forex traders jump into the market when volatility is high, they tend to suffer the consequences. High volatility in the forex market can leave you anxious and stressed, making it difficult to make solid decisions.
So, instead of doing what many others do and suffering the consequences. Use low volatility to your advantage. Target those currency pairs with low volatility so you can better time and plan for when a breakout occurs and volatility increases so you can reap the benefits.
Trading using breakouts isn’t easy and it isn’t for every trader but those that do it and do it well, reap the benefits. But breakout trading isn’t just for trading, there are loads more breakout strategies you can use to increase your gains.