Breakout trading is present in the forex market all the time. Every single movement in the foreign exchange industry is also a possible price that breaks a level. That’s why breakout strategies are very popular in the investment industry.
Identifying breakout chart events and what are the best strategies for break out trading could potentially become an exciting opportunity for you as a Forex trader.
Keep reading and discover what breakout trading is and how you can identify the best breakout chart scenarios to make money in Forex.
Beyond support and resistance, but including it, discover what the best forex breakout strategies are and how to identify patterns not everyone will see.
What is a breakout
First, let’s talk about the basics. A breakout is a price movement below or above a given level. Usually, levels respond to a predetermined or identified support, resistance, buying, or selling zones.
Usually, a breakout is backed by an increase in the volume of exchange that is supporting the movement. That’s the difference between a successful or a failing break. However, breakouts can be subjective as traders watch different timeframes, and they don’t tend to use the same support and resistance levels.
Its popularity comes as breakouts are easy to identify and to understand. It doesn’t have to be the same numbers for everybody, so it gives common, but also rare signals to enter the market.
As chart patterns can be over any timeframe or chart windows, so does the breakouts. That being said, breakouts and chart patterns can be classified into two categories: continuation and reversal patterns. However, we are going to talk about that another time.
But, why breakout happens?
Breakouts happen after a pair that has been contained above or below a determined level can finally break it. Those levels can be identified as support and resistance.
Supports and resistance are usually levels where a high concentration of buyers or sellers occurs. In support levels, buyers are there because they believe it is an excellent price to buy cheap. On the other hand, resistances are selling zones because bears think the price will not go beyond that point and it is a reasonable price to sell the pair expensive.
Finally, when all the selling or buying orders are done, or the efforts to contain the price are exhausted, the pair can finally break out that level, liberating all the contained force behind the movement.
So, traders try to catch that movement and to take profit of it. That’s breakout trading.
Breaking trading is the art to identify trends continuation or reversals at its early stages. When you manage it properly, it can offer significant profits with low risk associated.
Most traders think about breakouts as something that happens in small chart time-frames, but it is not true at all. It occurs in short timeframes such as one-minute or 15-minute charts. But a breakout can also happen in longer pictures such as one-day or one-month charts.
It doesn’t matter what time frame are you trading, but it is essential to consider watching different timeframes for confirmation or level identification. Also, what it really matters is the levels you are watching and your ability to identify breakouts in charts patterns. Then you can confirm your thesis with other time windows.
Also, it is crucial to understand the difference between a breakout and a 52-Week High/Low. A 52-week high/low is a level to watch, but it is not a breakout for sure. Remember that a breakout is a move above or below a resistance or support.
How to identify a Forex Breakout
There are many breakout strategies, but now we will focus on the first line of attack we are talking about possible breakouts and how to identify breakouts in charts.
Typically, breakouts occur when a price goes above or below ranges after a period of consolidation. It produces the most violent movements and makes the more pips in that direction.
In Forex breakout trading, the first things you should identify are the pair’s support and resistance levels. The more times the cross has touched, or tested, those areas, the more valid and important those levels are.
Also, the more time those levels have been on play, the more violent the movement following the breakout will be. It will work in small or big time frames, that doesn’t matter. However, think in the relative size of the previous price movements and the timeframe you are trading for the expectations of pips movements.
There are specific rules for breakouts. Usually, breakouts are confirmed only if the bar closed above or below the level that has been broken. Don’t believe in prices that breach levels just for a low or a high spike, but it returned below the resistance or above the support.
Also, breakouts are often backed by a change in volume. If a breakout is good, it should be accompanied by a sustainable increase in trading volume; however, if volume declines, it means that interest in that direction is also fading. Be aware of that, so you don’t want to get caught by a reversal.
Once you have identified a potential breakout movement, you should plan the trade with all their features, aka entry and escape points, price target and size of the deal.
Allow the breakout to retest
It is an important topic on breakouts. Usually, when a pair breaks above a resistance level, that level then becomes support. It also happens with the break of supports, the levels then become resistance.
So, it is typical for the pair that just broke a level, to come back and retest the previous price in the opposite direction. It will happen in the next periods, but it is normal. It will confirm your position and will allow it to go for more significant gains. So, be ready for that.
Set your price target
The basic rule in the forex trading is to cut your losses but allow your wins to run. That being said, you should set a reasonable price target.
It can be done by identifying the average pips move size between support and resistance, or vice-versa.
Usually, the bigger the broken range was, the bigger the break will be. A reasonable profit price will be the next resistance or support in the same timeframe your position is.