Sign In Password Login

Find passwordVerification code will be sent to your phone

Set your new password

Bind mobile phone numberVerification code will be sent to your phone

+86

Send code
60s
Send code
60s

Create an account

Login
Submit

I have read and agreed User Agreement , Privacy Policy

Other login methods

User Agreement

Confirm

Privacy Policy

Confirm

Breakthrough strategies that a master trader must master

Put on your headphones and enjoy podcast ~!

1.What is a Breakout?

Before we get into my favorite Forex breakout strategy, let’s first define the term, “breakout”.
A breakout is any price movement outside a defined support or resistance area. The breakout can occur at a horizontal level or a diagonal level, depending on the price action pattern.
Let’s take a look at two illustrations of one of the more common breakout patterns that occur in the Forex market. The first illustration shows a bullish breakout pattern.
Notice in the illustration above, we have a market that is trending up but has found resistance at a horizontal level. After two unsuccessful attempts, the market finally breaks through resistance. This signals a bullish breakout from a key resistance level.
The next illustration we’re going to look at involves a bearish breakout.

Just as you would expect, the bearish breakout is similar to a bullish breakout, only this time the market breaks to the downside. After two unsuccessful attempts, the market finally breaks through support. This signals a bearish breakout from a key support level.
The reason these breakouts are such an important trading strategy is because they often represent the start of increased volatility. By waiting for a break of a key level, we can use this volatility in our favor by joining the new trend as it begins.

2.The Only Forex Breakout Strategy You Will Ever Need

This particular Forex breakout strategy is one I have used for years. It has become my favorite pattern to trade, partly because of its reliability and partly because of the more than favorable risk to reward ratios it often produces.
There are four parts to this Forex breakout pattern.
(1)Support
(2)Resistance
(3)Breakout
(4)Retest
The illustration above is very similar to the first two illustrations. The major difference here is that instead of having one trend line and one horizontal line, we have two trend lines. One trend line is acting as support while the other is acting as resistance. This forms what’s known as a “wedge”.
The breakout to this pattern occurs when the market eventually breaks to one side or the other. While a wedge is typically a continuation pattern, I tend to trade it based on whichever way the market breaks. In other words, I let the market show its hand before making any considerations about future price movement.
Now let’s apply this same pattern to a USDJPY 4-hour chart.
Notice how in the chart above, the market had worked its way into a wedge pattern. As the market began to consolidate tighter, it eventually broke wedge support and subsequently retested this support level as new resistance.
This retest presented traders with a perfect opportunity to enter short.

3.Executing the Forex Breakout Strategy

To get a good idea of the setup in action, let’s take a look at each step including the entry strategy and where to place your stop loss.
(1)Entry
Most times your entry will come on a retest of former support or resistance. However, it’s important to note that depending on how strong or weak the market is, you may not get a retest. We will discuss this in greater detail later in the lesson. For now just know that it’s best practice to enter on a retest of former support or resistance, depending on which way the market breaks.
(2)Stop Loss
Your stop loss should be placed above or below the breakout candle, at a minimum. In the case of the USDJPY breakout pattern below, your stop loss should be placed above the candle that broke support.
In the chart above, the market broke wedge support on the breakout candle and subsequently retested former support as new resistance. This retest presented an opportunity to get short with a stop loss above the breakout candle.
(4)Setting a Target
Now that we know where to enter and where to place our stop loss, let’s discuss how to set a target. As you may well know, I’m a huge fan of using simple price action levels. So you can probably guess how we’ll go about setting a profit target.
Here is a much broader look at the USDJPY chart. This time, we’re looking at the daily time frame to see if we can identify a logical target for our breakout trade.
The first thing you’ll notice is the strong support area that has been in place for several months. This makes for an ideal area to target for our trade setup.
So what kind of risk to reward ratio did we get out of this trade setup? Let’s take a look.
In the USDJPY 4 hour chart above, we can see that the stop loss was 13 pips from the entry while the take profit was 50 pips from the entry. This gives us a 3.8R (50 / 13). In other words, if you had risked just 2% on this trade, you would have made 7.6% (3.8 x 2%).
While that’s an impressive gain on its own, what’s even more impressive is the fact that you would have made 7.6% in just 32 hours.

4.Further Analysis

Let’s turn our attention to another example of the Forex breakout strategy. This wedge pattern occurred on the GBPNZD 4-hour chart. One major difference here is that there was no retest of former support once the market broke to the downside.
Notice in the GBPNZD chart above, the market failed to retest former support before dropping 430 pips. But just because the market doesn’t retest former support doesn’t mean we have to miss the trade.
The retest that we look for as part of this Forex breakout strategy typically comes within the next few candles. So if the market begins to move sideways for more than three or four periods, there’s a good chance that the market won’t give a full retest.
Let’s take a closer look at the GBPNZD trade setup.
In the GBPNZD 4 hour chart above, notice how the market begins to move sideways for several periods. This is a good indication that the market lacks the strength to retest former wedge support. When you see this happen, it’s generally a good time to use a market order to join the forthcoming trend.
Here is the GBPNZD breakout trade from start to finish.
For this setup, our stop loss was 45 pips from the entry. Remember that you want your stop loss above or below the breakout candle. Because this is a short setup, our stop loss was placed above the breakout candle.
Our take profit, on the other hand, was 175 pips from the entry. The target was identified by the recent low which was made several weeks prior. Note that the market gapped down the following week and ran for another 150 pips before reversing.
Although this looks great in hindsight, the logical target at the time was 175 pips away, which still produced a very healthy 3.9R trade. So if you had risked 2% on this trade, you would be left with a profit of 7.8%. This particular setup took just 36 hours from start to finish – not bad to be able to make a 7.8% profit in 36 hours while only risking 2%.

5.Forex Breakout Strategy: The Real Potential

As I bring this lesson to a close, I want to leave you with one last setup. This particular breakout occurred on the USDJPY daily chart and represents what’s possible with the Forex breakout strategy you learned today.
The first thing you’ll notice is the length of time the market consolidated within this wedge pattern before breaking higher. The setup above formed on the daily chart, so from start to finish this consolidation period lasted for 180 days.
This brings me to an important observation about the Forex breakout strategy – the longer the market consolidates, the more volatile the breakout will be. This isn’t always the case, but 9 times out of 10 the market respects this idea of matching the length of consolidation to the level of volatility.
For those who were able to get in this trade at the breakout point and ride the trade until the consolidation period (take profit level) there was a massive gain to be had. A stop loss below the breakout candle meant a 50 pip stop with a potential gain of 600 pips. That works out to a very healthy 12R trade. At just 2% risked you would have made a staggering 24% profit.
Although rare, these 10R+ trades do happen from time to time. And with the knowledge you’ve gained in this lesson, you will be able to identify and profit from these patterns with ease.

6.Summary

I hope this article has opened your eyes to what’s possible with a simple Forex breakout strategy. Just remember that like any other trading strategy, this breakout strategy is not without flaw. Therefore always be sure to maintain a proper risk to reward ratio and use a favorable stop loss strategy on every trade.
We covered a lot of content in this lesson. Here are some of the highlights to keep in mind as you begin to implement this trading strategy into your game plan.
(1)A breakout is any price movement outside a defined support or resistance area;
(2)The Forex breakout strategy has 4 parts: support, resistance, breakout and retest;
(3)The retest of former support or resistance provides a trader with an opportunity to enter the market;
(4)If a market begins to move sideways for more than three or four periods following a breakout, there’s a good chance that the market won’t produce a retest of former support or resistance;
(5)Your stop loss should always be placed above or below the breakout candle (at a minimum), depending on which way the market breaks;
(6)It’s best practice to use price action levels to identify potential targets for this breakout strategy – a good place to start is the recent swing high or low;
(7)As a general rule, the longer a market consolidates the more volatile the resulting breakout will be.

7.Frequently Asked Questions

(1)What is the best breakout strategy?
Something simple like a wedge or channel break is my preferred method for trading breakouts. Just keep in mind that no two traders are alike, which means the “best” strategy is the one that works best for you.
(2)Are breakout strategies reliable?
Absolutely! As long as you take the time to develop a trading edge and stay patient, breakout strategies like the one taught here can be reliable and incredibly profitable.
(3)What is the best time frame to trade breakouts?
It’s subjective, but I have found the 4-hour and daily time frames to perform the best when trading breakouts.
(4)Do you need indicators to trade breakouts?
Price action is all you need. Some will argue that, and that’s okay. But in my experience, nothing beats raw price action for trading breaks.
(by Justin Bennett)

Comments

Post comment after logging in
0/500
Comments

Short Comments

  • I have often encountered this situation: if the market starts to trade sideways for more than three to four cycles after a breakout, it is very likely that the market will not retest the previous support or resistance.

    Reply
    0/500
  • 我非常喜欢突破交易策略,用突破进场也用突破出场。文章中的很多内容都很有效。

    Reply
    0/500
  • There is really nothing better than the original price action of interrupted trading.

    Reply
    0/500
  • 確實,我也發現 4 小時和日線圖在交易突破時表現最佳。

    Reply
    0/500
  • 跟所有交易策略一样,这种突破策略也存在缺陷。因此,在每笔交易中使用有利的止损策略很重要。

    Reply
    0/500

Short Comments

No comments yet, comment now

I want to contribute

ForexSoul - An online magazine for forex traders

Podcast of quality content assists your trading journey

Current Issue(Total of 10 articles)

HottestNext

Feedback

We value your suggestions

  • Select your problem

  • Content(0/200)

  • Contact

  • Submit

Add website to favorites

Quality content to hone your trading skills!

Add to favorites