Breakout Forex Trading Strategy
There are a number of different trading phenomena in forex. One of those is known as a breakout. A breakout is basically an asset’s price movement through a known or established level of resistance that is typically followed by a significant increase in the amount of volatility and heavy volume. In other words, breakout occurs when the currency pair’s price goes outside of its known support or resistance level with an increased volume.
The underlying asset is purchased by investors or traders when the price goes below (breaks) a level of support or when it goes above (breaks) a level of resistance. A typical breakout forex trader or investor will place a short position if the currency pair’s price goes below (breaks) support levels or place a long position if the currency goes above (breaks) resistance.
After being traded beyond the known price barrier, there is an increased trading volume and volatility and the prices for that particular currency pair typically head in the breakout’s direction. Breakouts are a vital indicator of future price trends.
But how does a forex trader trade using breakouts?
While you are able to utilize volume to trade stocks or futures, you cannot employ it in forex trading. While this leaves you at a severe disadvantage, you have to ensure that you do your utmost best to mitigate risk and adequately prepare yourself for to take full advantage of a good breakout.
When trading breakouts in the foreign exchange market, instead of using volume, you should focus on volatility. If you observe a major price movement within a short period of time then you know that volatility is very high. However, if you notice that there is muted price movement within that time frame then volatility is low.
Many forex traders or investors who jump into the market when volatility is high tend to suffer the consequences. High volatility in the forex market can leave you stressed and anxious, making it difficult to make solid decisions.
So, instead of doing what most others do and suffering the consequences. Utilize low volatility to your advantage. Target the currency pairs with very low volatility so you can better time and plan for when a breakout occurs and volatility increases so you can reap the benefits.
Trading forex using breakouts is not easy and it is not for every trader or investor but those that do it and do it well, reap the many benefits. Breakout trading is not just for trading alone, there are loads more breakout strategies you can use to considerably increase your gains.