When joining the Forex market, there are many things that need to be considered by the traders. You can’t just register on the broker’s website, start trading and expect to make money right away. Every successful trader needs to have a good trading strategy that they will follow in combination with good indicators and a strong mentality.
Selecting a good strategy is not an easy task, especially if you are a beginner trader. However, there are some strategies that can be easily followed by the beginners and be successful. Forex Breakout strategy is one of these strategies.
When using the Breakout strategy, traders are waiting for breakouts from significant levels. Some traders are jumping in and trade in the breakout direction, while others are waiting for candlestick confirmations.
There are various indicators that can help traders trade breakouts. Let’s discuss them in more detail.
Core features of the Breakout strategy
- Ideal for currency pairs: Any
- Ideal time chart time frame: Depends on indicators and currency pairs used
- Required time per day: Needs close attention from traders throughout most of the day
- Required indicators: Volume indicators, simple trendlines, MACD, RSI, and all oscillator indicators will work for this strategy
- Possible drawdown: 5%. It depends on the trader’s risk tolerance, but in general, drawdown periods are low as we are trading during trends
- Possible ROI: 10%-20%, can be higher with big leverage
- Recommended trade size: 1 lot
- Recommended trading platform: Any
How does the Breakout strategy work
Breakout strategy for trading FX involves trading breakouts. Prices go from significant levels to significant levels. Price movement might be stopped at a single price, and that single spot is called support or resistance (depending on the setup) level. Price might also be moving between support and resistance areas. Breakout from these areas/levels is especially attractive for traders as the significant levels can be served as stop loss targets. As a result, traders can get great risk to reward ratios in their trades.
The biggest problem for breakout traders is false breakouts. False breakouts occur when price breaches a significant level momentarily, and gets back. While in the process, most limit orders can get triggered.
In order to avoid trading false breakouts traders are using market orders, they await for the breakout candles to close outside the significant level and only later join the breakout. Some traders are using forex trading breakout strategy indicators such as volume, RSI, etc.
Choosing an indicator to use
The first step Forex traders need to take when trading with a breakout strategy is to choose an indicator that they will use for receiving proper signals. This is a simple yet challenging decision that traders need to consider really thoroughly. Indicators that can be used for this strategy are any indicators that give us a range in which price usually moves around. Indicators such as: Moving Average Convergence Divergence, Relative Strength Index, and any oscillator.
Not every indicator is fitted for every kind of trader, meaning that if something works for someone else, it does not mean it will work for you. Therefore, traders need to look at each indicator closely, maybe give each of them a try and then make a final decision on one or a few indicators.
Volume indicators are also highly used when trading breakouts. Increase in volume indicates that there’s an interest in any given trade. When volume increases when price nears a significant level, it might be an indication that the breakout will happen. Significant levels are fortified by large amount of limit orders. Breaching such levels requires a lot of energy. High volume brings us that energy. On the other hand, if volume is low, breakout might not happen.
Select a trading platform and utilize the indicator
Once we have selected the indicator that we will be using, we need to select which trading platform to trade on. MetaTrader platforms are probably the most famous and best platforms to use when Forex trading. Once we have this platform open, we simply need to select which currency pair we want to trade and then overlay the indicator on the chart.
Look out for Breakouts
Breakout strategy requires traders to keep an eye on the price charts in order to spot a price breaking out from its range. Now you might be asking yourself, what is this breakout exactly? Traders use limit and market orders to execute their objectives. Market orders enable traders to buy or sell currency pairs at current prices in the current moment. Limit orders enable traders to buy or sell from predetermined levels. When, for example, we have a large limit order position, and price reaches it using a small market order, it will partially get activated and serve as a barrier. Limit orders limit price movements, whereas market orders move prices. If the significant level gets breached and there’s no high volume limit orders hiding behind, price can make huge jumps. The breached level can serve as a great place for placing a stop loss. Which gives traders an amazing risk to reward ratios.
Pros and Cons of Breakout strategy
One thing that every experienced trader will repeat is that there is no perfect strategy. It does not matter how thoroughly you have thought about the strategy, how many hours of research and preparations have you done, it will always have a flaw or something that will be considered negative. The Breakout strategy is no exception.
Pros of using Breakout strategy
- It is an easy strategy and both experienced and inexperienced traders can use it.
- This is not just a Forex strategy and can be applied to any financial markets
- Can be used in different timeframes with relatively good risk-to-reward ratio
- Can be used to spot upcoming trends in early stages
Cons of using Breakout strategy
- There is a possibility of false breakout
- Inexperienced traders might open too many positions and overtrade
Example of the Breakout strategy in trading
Now let’s take a look at the Breakout strategy example in Forex trading. In this example, we are trading with EUR/USD currency pairs using the Volume indicator to spot potential breakouts.
The currency pair price had a significant level around 1.00985 price. The volume increased once the price got near the level. To trade to breakout, we could have used a Buy Stop order type and get into the trade the moment the level was breached, however, this strategy is more risky as it can’t defend itself from false breakouts.
The safest way to trade this setup is to wait for the breakout candle to close above the 1.00985 price. In addition, we have a confirmation from the volume indicator that traders are interested in the movement. And we can join the breakout using the long position.
FAQs on Breakout Strategy
Is Breakout strategy profitable?
Breakout strategy can be profitable. This strategy has a relatively good risk-to-reward ratio. Breakout strategies enable traders to use the smallest stop loss orders possible. The only downside of trading breakouts is that there are a lot of false breakouts in the market. Traders need to always manage their risks and trade using appropriate sizes to avoid blowing up their accounts.
Is Breakout strategy good for FX traders?
Many FX traders are trading breakouts profitably. Breakout trading is great because it offers an amazing risk to reward ratios. Trading breakouts are not difficult, however, there are many false breakouts to be aware of in the market. The strategy can be used by both experienced and novice traders, it can also be used in any financial market, and in different timeframes. All this makes this a very good and simple strategy to follow.
Which indicator is best for Breakout strategy?
Volume indicators are one of the best methods to use when trading breakouts. High volume indicates that breakout might take place. On the other hand, low volume means that investors are losing interest and breakout might not happen.