Forex Breakout Trading

October 4, 2015

forex breakout tradingThe Forex market currencies are in a constant dance between support and resistance areas. These can be trend lines, consolidation ranges, dynamic support and resistance and numerous others. Sooner or later a breakout from the support to resistance dance will occur and breakout traders aim to capitalize from this.

So imagine the scenario. A range has been established on a currency pair with 300 pips between the high and low. Every time price hits the top sellers enter the market as they see an opportunity to make money from the bounce that has happened over and over again.

The longer this goes on the more attention an area gains. New traders want a piece of the action and trade a bounce from the low next time it is hit.

Breakout Forex Trading Strategy

Every time this happens there is order flow in place. The trader who expects a bounce and puts their money on the line has to define a point in which they have got it wrong (a stop loss). Some market participants have stop losses a few pips away from the high/low of the consolidation range – others will not accept defeat so quickly and therefore have their stop loss 10 to 15 pips above/below the range. Other traders will have their stop losses 30 pips away and more. This is the order flow building that breakout traders are looking to benefit from when the range breaks.

Finally the range breakout comes! The high of the range is broken. If the range was clearly defined and the order flow is in place, as mentioned previously, we then have a scenario where the range traders need to liquidate their position and get out of the trade. If they were selling at the range high then they need to now buy to liquidate. Combine this with the speculative buyers who enter the market when the high is breached – the breakout traders – and we have potential for a strong momentum move!

The above scenario is exactly what a breakout trader looks for. Some traders may even combine fundamental information from a news release to trigger their buy at the breakout high. Others may wait for a chosen indicator to give a signal. The differing conditions that traders need in order to execute their orders is varied but the aforementioned order flow is vital.

I trade these breakouts often and constantly seek new ways to improve my edge. An understanding of the markets we trade and the associated dynamics is certainly useful for any trader.