The forex breakout strategy is one of the most common and most reliable methods implemented by successful traders. In general, a breakout is when a currency pair makes a move past a support or a resistance point. It “breaks through” the support or resistance level, thus giving this strategy its name. This article will outline 3 different ways to enter a breakout trade in forex.
There are 3 main ways that a trader can enter a breakout trade based on price action strategies (strategies that do not rely on the use of numerous technical indicators nor complex analysis.)
1. Enter during the consolidation phase. This is the most risky approach, in my opinion. Why? Because let’s face it, you really do not know which way the currency pair will move. By entering during the consolidation phase, you are starting with just a 50-60% probability of rightly determining the direction of the breakout.
2. The second entry method is to watch for a consolidation to occur, and then determine the upper and lower points of the consolidation range. Then wait for the currency pair to break through one of the points. Initiate the trade very soon after the price has broken through. Initiate the trade in the direction of the breakout. This strategy is a bit less riskly because you have waited for some confirmation of the direction of the move.
3. The third way to enter the breakout trade is similar to method 2 above. Again, you start by observing the pair in a period of consolidation. Next you wait for it to break through one of its support/resistance points. However instead of taking the trade immediately upon the breakout, the trader will wait for a “pullback” and then take the trade in the direction of the breakout. Of course, sometimes the pair will move with great momentum behind it and there won’t be a pullback. In this case the trader would miss some big moves while waiting for a supposed better entry point.
Personally, I prefer method 2 and take that approach in my own trading. This does not mean that my preferred method is the best overall, nor does it assume that my preferred entry method is the best for all others. Use a demo account to implement the different ways of entering a breakout trade. Then see which method fits your “trading personality” the best!
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