Trading Breakouts – Part 2

Filed under: Learn Forex Trading |

Playing a breakout is one of the most popular strategies employed by forex traders. A break refers to when price goes beyond a previous high or low. It is essentially when price breaks through a level of resistance. However, sometimes, these break result in false break and what are sometimes referred to as ‘fake outs’. Therefore, I feel it is important for price to close above or below the level of resistance before the breakout is confirmed.

Figure 1.

 

Figure 1 gives a good example of a breakout. I have marked in a significant level in the market with a thin red horizontal line. This was a previous low in the market, and when price broke through this level and closed there, this represented a significant and decisive break. We could have gone short at the close of this candle; with a stop loss placed just a few pips above the high of the candle, and a target of two times our risk. If we had taken this, this trade would have been successful for a very nice 2% rise on our bank.

 

Now, these trades are not going to be successful every time by any stretch of the imagination. However, if we can be right 50% of the time with a risk-reward scenario of 1:2, then in the long run, we will be coming out well on top.

 

Breakouts are one of the oldest and most used trading strategies in the book – and you would do well to learn how to use them and try to spot them on a daily basis. The great thing about breakouts is that you are going with the current momentum instead of against it, and this tips the odds in your favour even more. I will leave you with that for today, and I will take you through some more breakout examples in the coming weeks.

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