Make the most of a choppy forex market with breakout trading

Julie Brownlee, Fsp Invest, 29 May. 2014

Tags: breakout strategy, what is a breakout strategy, forex, forex trading, forex market, forex trading tips,

Breakout trading is a strategy followed by a lot of intraday forex traders. Breakout trading can be a good strategy to follow when the markets are choppy. Breakout trading works well with volatility. This is because the strategy works best in the short- to medium-term. And you only put trades on once you’re sure about the direction of the market. So what exactly is a breakout strategy? And how does it work in practice? Let’s take a closer look…

The ins and outs of a breakout strategy

A breakout strategy works like this: Currency prices bob up and down in a specific price range. You wait for the price to breakout from this range. Then you put a trade on in this direction, Max Munroe in Forex Round-Up explains.

This makes it sound like a simple strategy to follow. But there are some things you need to sort out first. How do you know your price range?

You can look at a price range in terms of time or in terms of a number of highs and lows. Take a look at the chart below…

Chart of a breakout

The blue boxes in the chart above show you areas of consolidation in the currency pair EUR/USD. Each box shows you multiple highs and lows joining together to give you a clear price range.

A lot of traders like to use the 30 and 15 minute bars for defining recent highs and lows. And then use breakouts from this range.

Rules for applying a breakout strategy

For a breakout strategy to work, you need to stick to the following rules…
  • Your stop loss is out with the price range.
  • Your take profit target is 2 or 1.68 times the width of the price range.

A technique used by many forex traders is to look for the price to show a consolidation pattern. This is when the price has traded nicely between defined highs and lows for a decent period before moving quickly.

Have a look at another chart…

Chart of a breakout

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This chart uses 30 minute bars. The range follows what the large candle defines.

You can see how it continued to trade in a neat range before breaking out.

So there you have it, how to make the most of a choppy forex market with breakout trading.

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