One of the most exciting forex trading strategies is the breakout, which occurs after a price movement beyond a certain level. The popularity of the process is because prices move rather too quickly, leading to trading when momentum is in your favor. Forex traders use the breakout strategy in their early trend stages to enter into a position. It leads to a surge in volatility, large swings of price, limit downside risks, and significant price trends if managed well.
A breakout can be at a diagonal or a horizontal level, depending on the action pattern of the price. Other levels that support the resistance and support levels include pivot points, moving averages, round numbers, Fibonacci levels, and price channels. After any breakout, many forex market traders follow the levels keenly.
If one side of those buying or selling pushes through, the other group moves quickly to avoid further losses, leading to sharp and quick price movements. A break of the price above the resistance level, leads to a trader entering a long position, and when the break is below the support level, they can enter a short position. If the current market trades go past the barrier, there is an increase in volatility, and prices trend towards the breakout direction.
Furthermore, the breakout trading strategy is ideal for weekly, intraday, and daily timeframes. It is also suitable for a wide range of trading styles. There are different types of breakout strategies, but the following two are the best to deploy, especially for beginners.
Most Popular Breakout Strategies
The initial step in the momentum breakout strategy is to recognize key resistance and support levels. Two situations likely to take place when using the strategy are an extremely long bearish candlestick that breaks and closes below the support level, or an exceptionally long bullish candlestick closing and breaking below the resistance level. In this case, the long candlestick is the force or momentum, and the strategy is ideal for the 15-mins, 30-mins, 1 hour, and 4-hour charts.
The trader enters into a market price long position if a long bullish candle closes beneath the resistance level. Placement of stop-loss could be five pips beneath the momentum candlestick low, while the benefit target can go three times the stop loss distance. A trader can enter into a market price short position if a long bearish candle closes beneath the support level.
The stop level now could go up to five pips above the high of the momentum candlestick, while the benefit target could go three times the distance of the stop loss. Furthermore, the distance of the stop loss broadens because of the huge momentum candlestick, so it is crucial to minimize risks by ensuring proper position sizing.
Moreover, the price is volatile and can go sideways, downwards, or upwards instead of continuing in the same breakout direction. After veering off, the price later continues in the breakout direction. Traders that use this strategy like it because it does not need many indicators for implementation.
In the breakout pull-up strategy, two breakout patterns determine the price action. The first pattern uses at least two touches to identify essential support and resistance levels. Two touches demonstrate a greater likelihood of streaming order behind the particular level.
The success of a breakout depends mainly on the quantity of sellers and buyers present at a particular trading level. The more there are, the better the odds of a significant breakout. The other pattern is a pullback decrease from that resistance or support level. The motive here is to recognize breakout arrangements shaping the trend.
A vulnerable bears pullback means less strength resulting in the certainty that a breakout could be unavoidable for the bulls. After identifying the levels, a trader is then free to proceed with trading using the strategy. On the off chance that the value closes over the key resistance or support level, a cutoff or limit order trades on that particular level in the breakout direction.
Wrapping it up
Forex breakout patterns are trading strategies that provide traders with high profits once they identify their setups. Other patterns besides the above two breakouts quickly spot price actions to help in trading with high probabilities. Of the two strategies above, breakout pullback patterns are ideal for beginners, as they require less skill. They also help in building trading breakouts with confidence over time.