Trading Currencies - Forex Breakout Strategy

The Breakout Strategy is one of the most commonly used by professional and successful traders. Even though it is used by professionals, it is really simple to implement using regularly updated technical charts which are readily available online.

Breakouts in the forex market occur anytime that a price breaks above or below a resistance or support point. These points are determined by technical analysis and anyone can find what the technical points are on charts online. Sometimes I use the free technical charts available to all at fxstreet.com. However, I highly recommend the technical analysis charts and other resources inside the members area at plus.dailyfx.com.

For those of you who are very new to forex trading or who have never studied the breakout strategy, I will explain the definition of support and resistance points. A support point is a low point which has shown support for the particular currency pair (meaning the last time the pair touched that level it did not fall further). And a resistance point is a high point that the pair has tested but has not been able to break above. So, for example, let's say most recent technical chart on the the EUR/USD gives the following information: S1: 1.3609 S2: 1.3584 S3: 1.3560, and R1: 1.3657 R2: 1.3682 and R3: 1.3706. This means that S1 is the current first level of support for the EUR/USD and the last time the EUR/USD tested S1, enough buying occured that it did not fall any further. If the EUR/USD falls through S1, then S2 is the next level of support, and finally S3 is the third level of support. Likewise, R1 would indicate the first level of resistance through which it may be unlikely for the EUR/USD to be able to break above. If EUR/USD does break above R1, then R2 is the next level of resistance, and R3 is the third level.

Now that you fully understand the basics and the simplicity of reviewing the technical chart. It is easy to spot a breakout trading opportunity. When the price of a currency pair breaks below a support point or breaks above a resistance point, a high probability trade in the continued direction of the breakout may be executed. (If the currency pair breaks through a support point, then go short/place a sell order on that pair. If the currency pair breaks above a resistance point, then go long/place a buy order on that pair.)

The trick here is to enter the trade as soon as you possibly can after the breakout occurs. If you wait too long, you could miss the major move and actually enter too late, possibly even so late that the trade reverses for a loss. If you enter the trade and set a reasonable stop profit, you will minimize your loss potential while setting yourself up to collect the big pip movements that are often associated with currency pair breakouts.

Now obviously, a full breakout does not occur every time a currency pair breaks above or below a technical point. Sometimes it leaps above or below the technical point briefly and then pulls back. Such incidents are often referred to as "false breakouts."

However, catching the trend on a true breakout is worth losing some pips on all the false breaks the trader has to take when using this strategy. Hundreds of pips can be gained when a trader enters a trade at the beginning of a true breakout. So by setting your stops correctly, you should not lose too many pips on false breaks, and you may even be able to grab a small profit even on a false breakout.

When you catch a true breakout, however, you could very well gain hundreds and maybe even 2 hundred pips. When this happens you can set a trailing stop and let the trade continue to run at no risk with your profits "locked in." The first time a trader catches a true breakout with great momentum behind it, the trader will definitely recognize the power and simplicity of the breakout startegy and will realize that all of the small losses on false breaks were well worth it!