Beat the Forex Market in Breakout Trading

A Forex breakout is the sudden price surge in a particular direction after a period of consolidation or sideways movement. It is one the most commonly used trading strategies because of the clarity and simplicity of execution. It is so simple that even new traders without much experience can trade the market profitably with it.

The trend is your friend until in bends, however, strong trending markets occasionally pause and move sideways. It may mean that the trend is over, or the market has only temporarily stopped in a consolidation zone before making any impulsive movements again. A breakout occurs when price moves away from its existing pattern. It can potentially change a downtrend to an uptrend, or an uptrend to a downtrend.

Frequently, a breakout occurs when price breaks a support or resistance level. They are usually accompanied by high volume and big movement of price. A trader who uses a forex breakout strategy enters a long position after the price breaks above resistance or enters a short position after the price breaks below support.

The breakout pullback strategy

Breakout trading is very profitable but it carries high risk because there is no guarantee that the breakout will persist. False breakouts often happen when the price may appear to break a certain level but eventually reverts back and closes back to the trend. Since many breakouts are false, breakout traders look for other indicators to confirm that the breakout is real. Most of the time, price retraces after a break out but eventually reverses again and continues in the original breakout direction. Conservative traders often look for these retracements or pullbacks after a breakout before entering the trade. Because breakouts cause impulsive moves, and impulsive moves are always followed by pullbacks, smart traders wait for trade signals on pullbacks and ride the next impulsive move again.

A price pullback occurs when price retraces to a support/resistance level that was previously broken. It is one of the highest quality signals that professional traders and big players are looking for after a breakout in many chart patterns. It is an extremely strong trading signal, which results in frequent winning trades. This is enhanced by the fact that when trading pullbacks, we are actually trading with the prevailing trend.  The breakout that came before the pullback confirmed the strength of the trend and enhances the quality of the trade signal.

The breakout box strategy

The box occurs when price is confined inside a trading range. The box pattern indicates that the market is in equilibrium, or no side of the market is stronger. It is a period in which the bulls and bears have equal strengths. Such periods eventually end by a breakout to one side or the other. However, a box set-up is only confirmed when the two parallel support and resistance levels that confined the price were tested at least twice.

A breakout from the box range indicates the victory of the bulls or the bears from the battle. We will then join the winners by taking trades in the direction of the breakout. We can enter trades when price breaks the box to one side. However, most of the time price returns to retest the level it has recently broken, thus creating a pullback. Hence, the breakout is not reliable enough to trade. Instead, we will wait for a pullback to the box and then trade in-line with the original breakout direction.

This pattern and entry tactic is highly reliable with results of at least 80% success rate. It is a leading indicator since this pattern shows you exactly in which way the market is going to advance. The market condition around the signal helps you to identify the most logical stop loss and take profit levels.

Since this system is flexible and almost rule-based, you can establish your precise rules for both trade entries and exits that, once programmed, can be automatically executed by a computer. The Range Box Trader is a perfect Expert Advisor to help you trade the breakout box strategy in a semi-automated way. It helps identify range box patterns across multiple currencies and executes trades automatically with precisely calculated stop loss and take profits based on the market condition. Trailing stops and other custom settings can be configured to fit the behaviour of every market.

The Trendline Breakout

Trendline breakout trading is a powerful method to take advantage of the numerous trading opportunities available. The market often trades diagonally, forming an uptrend or a downtrend. A trendline is plotted along the uptrend or downtrend in order for a trader to quickly visualize the strength of a given trend on a specific timeframe. It is drawn connecting two or more lows or highs, with the lines projected out into the future. Traders then look on how the future price reacts around those levels. A breakout trader then enters a trade at the break of the trendline at trend reversals.

In fact, the most profitable trading system boils down to simple support and resistance, which includes these trendlines. Big market players such as hedge funds and banks are using trendlines (along with fundamental ideas) more than indicators. Thus, a trader must learn how to plot trendlines properly and trade them profitably.

Trendline breaks are due to several factors such as major news releases, horizontal support and resistance levels, and the market responding to a much stronger opposing trendline. A trendline breakout doesn’t necessarily lead to an immediate trend reversal, sometimes the market trend resumes, leaving a false breakout of the trendline.  Most often, the market retraces or pulls back to the trendline after an initial breakout before finally reversing the trend. When a trendline breakout happens, you don’t know whether it is a full trend reversal, a retracement, or a false breakout. Thus, it is wise to always employ a stop loss.

On entering trades, some traders prefer to wait for a pullback after a trendline breakout. Because a pullback does not always happen and sometimes price continues to go up or down for a very long time and never pulls back, some would enter at the initial trendline breakout. However, if you entered at the initial breakout and a pullback happens, you would get stopped out in a loss or at breakeven if your stop is too tight. Because we never know when a false break or a breakout pullback setup happens, smart traders would take every available trade with valid trade setups. If the price pullback happens, they would have locked in some profits or will exit the trade at breakeven. Then they would again enter a trade on the pullback.

However, traders often miss trading opportunities because of not paying attention or not being available. Trading trendline breakouts may require you to be always in front of your computer screen every day waiting for possible breakout setups. You may occasionally stay up late at night working overtime trying to anticipate the best breakout opportunities. But then you end up not catching such a profitable opportunity. This might be exactly where a tool like the Trendline Trader Expert Advisor comes to your aid.

With the Trendline Trader, you don’t have to be glued to your computer screen. Just draw the trend line on the chart, set up TT EA with your desired settings and enjoy your day. Although the TT takes care most of your trading activities, you need to draw a trendline on your MT4 chart yourself. You could also fully automate your trading through the use of some MT4 indicator that can effectively draw the trendline for your TT EA. If you are a trader using trendlines, then this is a must-have application.

The TT app will monitor the market price and will only initiate trades when the price breaks through the trend line. Stop loss, profit levels, and lot size are automatically defined right at the initiation of a trade, and are logically based on the market condition. You may also set them to a fixed size in pips. To avoid being trapped in a false breakout, the EA has a revolutionary Smart Breakout technology built in to help you avoid false breakouts by automatically adjusting the trendlines.

The Candle Range trading strategy

Basically, this strategy allows intraday traders to catch and profit from short term trends. It shares some principles from price action trading strategy since it doesn’t incorporate any indicators, thus, keeping it very simple but highly profitable. There is no ambiguity or subjectivity in its rules since it has predefined entries, exits, money management and position sizing.

This strategy focuses more on intraday breakouts, preferably using it only on the hourly chart during the London and New York trading sessions.  This is because it has a higher winning probability if it is implemented during a highly volatile market, where the price range and number of market participants are higher. The high volume and market participation are the core ingredients in confirming the validity of a breakout and subsequent trend. It is also more profitable when trading it on major currency pairs such as the EUR/USD, EUR/JPY, USD/JPY, AUD/USD, NZD/USD, and GBP/USD due to their lower spreads and less frequent price spikes.

The entry rules are very simple: take the last high and low price levels of the last 4 number of candles and open trades when price reach those levels, and sticking with it until the market reverses or consolidates. Specifically, when the London session opens, candle range traders look for the highest high and lowest low of the previous 4 candlesticks. If the price breaches the highest high of these 4 candles, a buy position is initiated. Conversely, if the price breaches the lowest low of those 4 candles, a sell position should be opened. Since this method is purely rule-based, most traders of this strategy place conditional orders at 8:00 GMT, and don’t have to constantly monitor the chart to open a position.

The stop-loss level is always predefined before opening a position. In a buy position, the stop loss is always placed at the lowest low of the 4 candles. On the other hand, the stop loss level of a sell position is placed at the highest high of the 4 candles.  A trailing stop is highly recommended to lock in profits. If the trade moved favorably, the stop can be moved to the lowest low or highest high of the preceding 3 candles, and updated hourly as the trade moves in a favourable direction.  If the market did not hit the stop loss or trailing stop, the trade is manually closed at the end of the trading day or 22:00 GMT.

By employing basic trading tactics, such as going with the trend, cutting your losses short and riding your winners, this simple strategy can potentially give excellent returns. However, if you trade forex and have a full time job or just do not want to sit in front of the computer all day, you will likely miss those moments when you need to open the trade.

The Candle Range Trader EA can help you with this. You just need to set your desired settings and it will monitor the Forex market 24/7 and open trades at the right moment. This EA follows exactly the rules of candle range trading method. Once started, the EA will draw a range box, called Candle Range, based on the number of last closed price candles that you defined in the EA settings. Once the market price reaches the high or low of the Candle Range, the EA will open the corresponding trades.

You need to set the desired start and end trading hours, number of last closed candles to be used to create the Candle Range, and other parameters to start the EA. The EA can be set to trade only a single Candle Range at a particular time. But you can also configure it to trade in an unlimited time manner by redrawing the Candle Range and opening new trades as price continue to create new candles. Candle Range Trader can be used on any currency pair and any time frame.

Trading breakouts can be done in many ways

There are quite a few ways to trade breakouts as you have seen here.  Which strategy appeals the most to you as a trader?  Breakouts should be embraced and employed in your forex trading because they always exist in one form or another.  As with any strategy, endless practice will make you a better and more effective trader.

Take one of the strategies and try it out for yourself or post your comments and questions about the techniques below. Share your most successful breakout strategy here.