Breakout Strategy

My Forex Breakout Strategy Revealed

January 11, 2010 by Kelvin
Filed under Forex Tutorial

7 Comments

Forex breakout is one of the more commonly used trading strategies that are used by currency trader. The main reason it is so widely used is because of the clarity and simplicity of execution. It is so simple that even new traders without much experience can trade profitably with it if they put in some effort to practice the strategy in their demo account.

So what exactly is Forex Breakout?

It is the sudden surge of price in a particular direction after a period of side way movement or consolidation. With the sudden price movement, you will then enter a trade in the direction to grab the profit by riding the trend.

Forex Breakout Sudden Movement

But How to Identify Forex Breakout Opportunity

First of all, you need to know the various candle patterns that will eventually constitute a breakout trading.

1) Triangle

Triangle

2) Flag

Flag Formation

3) Trend Channelling

Trend Channel Formation

These are the common patterns for a forex breakout to occur. Usually It takes some time for the patterns to emerge and you should be on your toes when you saw these patterns on your chart and wait patiently for an entry opportunity.

Secondly, you need the help of an indicator called “Bollinger Bands”. The purpose of this indicator is to provide you with volatility check. It will be able to tell you whether the price is currently in consolidation or not.

When the upper and lower bands are narrow, it is signaling to you that the price is currently in consolidation and you should be waiting for a breakout.

Here are the steps I usually take to trade forex breakout

1) Setup the following indicators – Bollinger Bands (Default Setting), Stochastic (Slow) and MACD (Moving Average Convergence Divergence).

2) Draw the necessary trend lines to identify support and resistance level or even channel wall.

3) Always keep a lookout for the Bollinger Bands when it is narrow as it usually signals a consolidation in progress and then wait for the stochastic to either go oversold or overbought. Once the price produces a sudden surge in movement and also at the same time the bollinger bands starts to widen, you should then wait for the stochastic to either curve up if you are going LONG or curve down if you are going SHORT.

Bollinger Band Volatility Check

4) Always wait patiently for a proper trend line break before you enter any trade. Failure to do so may lead to loss of money due to fake outs.

Example

This is usually how I trade breakout in forex and the winning percentage is pretty high for this strategy. Take some time to practice this strategy on your demo or micro live account until you are able to achieve consistent success before you go into standard account trading.