Trading Breakouts

Filed under: Learn Forex Trading |

There are many ways to trade breakouts in forex, and it is one of the key methods employed by traders. A breakout occurs when price moves above a previous high or low.

 

One way of doing this is to choose a certain number of days for the high or the low. For example, you could look at the high and low figures for the past twenty days, and trade if price breaks through this high or low (either long or short, depending on which side the breakout occurs). This is another method that was used by the famous and successful ‘turtle traders’.

 

This could also be filtered with two moving average to assess the current trend. For example, you could only go long if the fast moving average is crossed above the slow moving average. And you could only go short at the breakout if the fast moving average is crossed below the slow moving average. This makes sure that we are always trading with the trend rather than against it, which just tips the odds in our favour just a little bit more.

 

Another way to trade breakouts is by using price action signals at significant areas of support and resistance. When price forms an inside bar at an area of support/resistance, it is consolidating, the market is unsure, and it could go either way. However, once price breaks through that level and closes above or below it (depending on whether it is a potential long or short opportunity), it is likely that the market will keep moving for a while. This is because a lot of people will have had their stop losses hit. It is also then likely that old resistance will be become a new support level.

 

In summary, trading breakouts is a useful and profitable trading tool – but only if you know how to use them properly.

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