How To Use Breakout Strategies To Profit From Forex

An Introduction To Breakout Trading On Forex

Philip Moore Copyright 2012 ondon Forex Open http!""###$london%orexopen$co&

'o# To ()e Breakout *trategie) To Pro%it Fro& Forex

Contents
Introduction $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ + 1$ The Ba)ic) O% Breakout Trading$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ , 2$ The Ba)ic Breakout$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ +$ Fal)e Break Out) $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ . ,$ /ange Breakout *trategie) $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 0 -$ 1ey Point) To Con)ider 2hen Trading Breakout) $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 3 Conclu)ion $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 10

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Introduction
$here are "any #ays in #hich you can trade the Foreign %xchange "ar&ets and a #ealth o! strategies and syste"s that can e used. All have the "ain o 'ective o! atte"pting to provide a consistent approach to "ar&ets that #ill e a le to deliver pro!its although the actual approach #hich is use "ay e very di!!erent. O! the "any approaches that can e used !or regular pro!it generation is the rea&out trading strategy.

Thi) trading )trategy re&ain) popular #ith trader) %or t#o &ain rea)on)$ The %ir)t i) that it o%%er) the potential to deli4er high pro%it)$ The )econd i) due to the %lexi5ility that thi) trading )tyle o%%er)$ Breakout) occur in all &arket6 not 7u)t Forex6 &aking the techni8ue) o% 5reakout trading uni4er)al$ They can al)o 5e u)ed in a #ide range o% &arket condition)$ They do not re8uire )trong trending &arket) to yield a pro%it and #ith the correct pro%it target) and )top le4el) applied6 can 5e #orth#hile )trategy to trade in 4olatile &arket)$ In thi) guide #e look at )o&e )i&ple application) o% 5reakout trading )trategie) and outline )o&e )i&ple rule) to %ollo# in order to &ake the &o)t o% thi) trading )trategy$ Phil Moore http!""###$london%orexopen$co&

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1. The Basics Of Breakout Trading

(rea&out trading strategies are one o! the "ost popular Forex strategies used y traders. $hey are pri"arily used to capture "oves in the early stages o! a trend #hen a currency pair is seen to "ove eyond a prede!ined level in the "ar&et. $his level can e a previous level o! support )resistance or a "ove out o! a a" ac&no#ledge "ar&et range that has de!ined previous trading oundaries. $he co"pletion o! chart patterns* highs and lo#s in the "ar&et or even the preceding trading session can all provide situations !or rea&outs to occur. $he central concept ehind a rea&out is to capture the "ar&et "o"entu" that acco"panies the rea&. +ar&et orders are placed to e activated in the direction o! the rea& #hen the price starts to "ove eyond the esta lished trading range. At this point "o"entu" is anticipated to increase as increasingly* traders ad'ust their positions to ac& the "ar&et direction identi!ied y the rea&. %ssentially "ore uyers ,or sellers- co"e into the "ar&et and increase the "o"entu" o! the "ove.

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2. The Basic Breakout

A &ey ene!it o! rea&out trading strategies is that they can e used in a variety o! "ar&et conditions. $his gives the" a #ide application and delivers plenty o! opportunities !or pro!its to e "ade. $hey tend to #or& est at ti"es #hen high volatility is high and #hen there is plenty o! "ar&et volu"e. $hese t#o !actors are need in order to help ensure that su!!icient "o"entu" can e generated !ollo#ing the initial rea&. .t is this "o"entu" that rea&out traders loo& to capture as they loo& !or continued !ollo# through uying to uild pro!its !ro" the "ove. (rea&outs are oth a popular and i"portant trading strategy ecause they can also prove to e the starting point !or ne# price trends in the "ar&et. $hey can e used on any chart ti"e !ra"e* !ro" / "inutes through to daily or #ee&ly charts.

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3. False Break Outs

$he ter" 0False rea&out0 is used to descri e a trading scenario #here the "ar&et loo&s to !irst rea&out in the opposite direction o! an anticipated rea& e!ore assu"ing the intended direction. For exa"ple* a ranging "ar&et "ay e loo&ing to rea& higher ut instead it initially rea&s lo#er. $his o!ten occurs #hen the "ar&et is loo&ing to ta&e out esta lished &ey stop levels. .t is also provides a good lesson in #aiting !or con!ir"ation o! the desired rea& prior to entering a position. False rea&outs are o!ten traded in addition to conventional rea&out strategies #ith oth approaches o!!ering an excellent "ethod o! capturing strong* !ast "ar&et "oves.

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4. Range Breakout Strategies

1ange rea&out trading strategies target an esta lished range in the "ar&et. O!ten "ar&ets #ill range !or long periods. 2hen the range is !inally ro&er this can e acco"panied y a strong rea&. 1ange rea&out trading strategies are also so"eti"e re!erred to as 0 ox rea&out0 strategies due to the characteristic shape o! a ox #hich is dra#n on the chart. .! the "ar&et rea&s outside o! the ox in either direction then a rea&out is assu"ed to have occurred. 3tops are generally placed so"e #ay inside the ox to acco""odate any s"all pull ac&s as "o"entu" uilds.

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5. Ke !oints To "onsider #hen Trading Breakouts

4ere are the !ive &ey rules you should "a&e use trading rea&outs to ensure you are a le to "axi"ize your trading results #ith this strategy. 1. Identify The Best Markets To Trade (rea&out trading strategies #or& est #hen "ar&et volatility is high. .t there!ore stands to reason that this strategy these strategies are "ore li&ely to succeed at the eginning o! "ar&et session #hen volu"e and volatility tend to e at their height. Also consider the currency pair you are trading. 3o"e exhi it greater volatility in their trading and so are "ore suited to rea&outs. For exa"ple* trading the 5(6)U37 currency pair at the opening o! the London "ar&ets #ill provide a greater chance o! rea&out opportunities. 2. Have A Defined Entry Point Use a set "ethod to de!ine your criteria to enter the rea&out. 7on0t e too &een to enter the "ar&et ut see& con!ir"ation o! the "ove !irst. %ntering early can see you caught up in a !alse "ove. 6lacing your entry point eyond the rea& level or on a con!ir"ed candle close can provide added con!ir"ation o! the rea&. 3. Always Trade With A et Profit !"#e$tive (e!ore entering your rea&out trade you should &no# the level at #hich you are going to ta&e your pro!its. $his could e a set level that you use !or each trade ,i! using a set ti"e strategy- or a calculated level #hich

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ta&es into account the average "oves at the ti"e o! day or i"portant support and resistance levels on the chart. As rea&outs can o!ten result in the start o! a "ore do"inant trend you it can e advisa le to set "ultiple pro!it o 'ectives on the trade. $his #ill also ena le you to oo& so"e pro!its along the #ay. %. Define &o'r Entry ('les Use a de!ined "ethod o! entry !or your trades and try to !ilter out the #ea&er signals. (rea&out trading is a pro!ita le strategy as the "oves that !ollo# the rea& can ring ig re#ards. 4o#ever you don0t #ant these pro!its to su!!er !ro" chasing !alse "oves. Only ta&e the highest pro a ility "oves #hen the rea&out occurs. 7on0t chase the "ar&et. .! you "iss the "ove then e patient and #ait !or the next step8up to occur. ). Mini*i+e &o'r (isk With to,s 2e have already "entioned that False rea&out "oves o!ten happen. %ven though you should try to con!ir" the rea&out e!ore entering there are ti"es #hen you can still get caught in a !alse "ove. $o "ini"ize this ris& place a tight stop on your position. $his could e elo# the prior rea& level ,support)resistance- or the prior "ar&et range. Also don0t !orget to "ove your stops as the rea&out gains "o"entu". $his #ill help you to loc& in pro!its.

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"onclusion
Capturing "oves is only hal! the e9uation #hich e9uates to a success!ul rea&out strategy. .! you #ant to ensure your strategy is pro!ita le in the long run you need to ac& this up #ith good "oney "anage"ent and ris& controls. (rea&out trading does not al#ays have to target the ig "oves. :ou can capture s"all pro!its !ro" a rea&. 4o#ever you should &eep in "ind the level o! ris& attached and &eep your stops tight. As #ith all !or"s o! trading it is the slo# and steady approach that #ill lead the to greatest gains in the long run. (iography $he London Forex Open "orning Forex trading syste" exploits rea&outs at the opening o! the London +ar&ets !ollo#ing the Asian "ar&et range. Find out "ore a out ho# you can pro!it !ro" trading rea&outs as part o! your trading strategy. http;))###.london!orexopen.co"

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