Forex Breakout Strategy

Forex Breakout Strategies

The key idea behind Forex breakout strategies is that periods of low volatility and a tightly constricted trading range are inevitably followed by the price “breaking out” of that range and moving strongly in one direction or another.

When you catch a breakout, you can get a very low risk and high reward trade, but the success rate of executing such a trade is generally low for most traders. This is due to the fact that there are many false breakouts awaiting budding breakout traders, so if you truly want to be successful in breakout trading, then you need to take heed of these Forex breakout strategies and tips.

Selecting The Right Market And Timeframe For Breakout Trading

The success of your Forex breakout strategies depends very greatly on the market you select and also the timeframe that you trade in. While every market does go through ranging periods followed by breakouts, some markets break out with greater conviction and follow through than others. My personal favorite for breakout trading is the GBP/USD, because the moves tend to be very large when they happen. However, with great reward also comes great risk, and the GBP/USD is also notorious for false breakouts and what are termed as “fake outs”, which are false breakouts one way followed by the true breakout the other. If you’re just starting out, you will be better off with the EUR/USD instead, which has less pronounced moves but less possibility of giving you a false breakout as well.

For breakout trading, I would recommend trading a higher timeframe like a 30 minute or hourly timeframe rather than a five minute timeframe. Five minute timeframes will give you a lot of trades, but a lot of false breakouts as well. In addition, trading the 5 minute timeframe won’t give you sufficient profits to cover your losses from false breakouts and the like, so it’s best just to stay away from trading this timeframe with Forex breakout strategies altogether. While you will still get false breakouts and fakeouts with the 30 minute or hourly timeframes, they are less frequent and your profits from a successful breakout will more than outweigh the losses.

My Best Forex Breakout Strategies And Tips

If you are new to breakout trading, then I would suggest that you stay away from news release trading for now until you have gained more experience. That said, trading the news around times of high impact economic data being released like the NFP is the ultimate breakout setup and can be very profitable if you trade it correctly. However, with great reward there always comes great risk as well, and you risk being destroyed if you don’t have your trading mechanics right for this event. It’s better to target the London Open for the EUR/USD when you are starting out, just to get a feel for what a breakout feels like, as well as a false breakout and fakeout.

Personally, when I trade breakouts, I will define the range first. Don’t be tempted to draw too optimistic a range, because this will subject you to false breakouts of your own making. Look to the last 20-30 bars to define your range and make sure that it’s a tight one. There’s no sense trading a breakout setup when the prices are volatile, because the breakout from a volatile and wide range will not pay off for your risk. Once you have defined your range, set your entry stop a few pips outside of that range and your exit stop on the other range extreme. Once your trade is entered, don’t be hasty to exit your trade if it falls back to the range again, and don’t set your stop within the range itself. The price will often go back into the range to “test” the resolve of the traders before it catapults itself on its way to a huge breakout move, so don’t be fooled. To exit your trade, target the next significant level like a 00 or 50 level or a pivot point/Fibonacci level.

Useful Video That Introduces and Explains how Forex Breakout Strategy Works:

The Final Word On Forex Breakout Strategies

All in all, Forex breakout strategies can be a very rewarding tool in your trading arsenal if you do it right. It’s vital to ensure that you clearly define a tight range and be disciplined in your trading, and you should have every chance of reaping rich trading profits from your efforts