Looking to trade short-term? A breakout trading strategy could be the perfect option for you…

Julie Brownlee, Fsp Invest, 07 Jan. 2015

Tags: breakout trading strategy, trading strategy, breakouts, trading breakouts, trading, trading charts,

If you want to trade intraday or be in and out trades in a day or two, a breakout strategy is one option to consider.

A breakout trading strategy isn’t concerned with what’s going on over the longer-term. It’s all about what’s happening now. This also makes breakout trading a good option for when the markets are volatile.

So what is a breakout trading strategy? And how can you spot breakouts on charts?

Read on to find out…

What is a breakout trading strategy?

A breakout trading strategy is when a high and low are in a price range. You sit back and wait for the price of the asset to break out of this range. You then put a trade on in that direction.

The key to using a breakout trading strategy successfully is defining the price range.

You could use a price range based on a certain time period or a specific number of bars. You can also use a price range based on a series of consecutive breaks of highs and lows.

Have a look at the chart below…

Chart of a breakout trading strategy

Look at the blue boxes on the chart above of the euro dollar. These show areas of consolidation. In other words they are areas of multiple highs and multiple lows in a clear range.

For instance, you could use 30- and 15-minute bars to define the price range of highs and lows. Then you’d wait for breakouts from this range.

The rules of a breakout trading strategy

If you enter a trade based on your breakout trading strategy, you need to out a stop loss on to protect yourself against the breakout not lasting.

If you were going long, this would be below the price range. If you were going short, this would be above the price range.

You’d place your target price between 1.68 to 2 times the width of the range, Max Munroe in Forex Round-Up explains.

Traders commonly look for some price consolidation first. In other words, you want to see the price trading between defined highs and lows.

A breakout trading strategy in action

Let’s have a look at another chart. This one is also of the euro against the dollar, but using 30-minute bars this time.

Chart showing a breakout trading strategy in action

You can see the price movement in the shaded blue box. The large candle at the left of the box defines the range. You can then see the price consolidating.

You can see how the price remained in its range before breaking out.

So there you have it. If you want to trade short-term, a breakout trading strategy could be the perfect option for you.

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