Break-out trading refers to prices 'Breaking-out' of either a technical pattern such as a triangle, a consolidation range or trend channel.The theory of break-out tading is that price momentum will continue to carry the currencies far enough beyond the break-out point for the trader to be able to seize a profit.One,three, or five minutes charts can be used for traders using break-out trading for intraday markets, while daily charts are best for end of day break-out trading.
Break-out trades can be either long or short based on the direction of the break.However, break-out trades should always be taken in the general direction of prices( ie pro-trend) and never against it.
Volume plays a critical role in choosing break-out trades.A trader should see increasing volume alongwith the break-out in order to confirm momentum before taking a position.It is important to note that volume spike at the break-out, followed by a rapid decrease in volume often means that the break-out is weak and vulnerable to failure.Such break-outs should be avoided.
traders have tended to restrict their trading of break-outs to daily charts.There are tradable break-outs in intraday timeframes also.
Exits are discreationary once profits are obtained with this method.Many traders like to use trailing stops to allow profits to build.The one hard and fast rule, if prices immediately drop back below the break-out line after you enter the position, then close the position.You can always re-enter once the currencies breaks-out again.But a failure to continue in the direction of the break-out often leads to losses.
What is a break-out? They are basically price movements that shoot out of a price consolidating range.Break-outs can occur either above resistance or below support levels.
What is the significance of it? A break-out from a recent price consolidation typically indicates that prices are likely to keep moving in the same direction.If the break-out occurs above resistance levels, prices are likely to keep going up.If it occurs below support levels, prices are likely to keep going down.
Why are break-out good predictors of future price movement?When the market price moves below support levels for example it means that the buyers that were supporting the price have 'run out of steam', resulting in the sellers pushing price down.And because the buyers have no more strength the remaining sellers are expected to further push the market price even lower.
The opposite is true for prices that breaks above resistance levels.
There is actually no single method that can predict future price movements with a hundred percent certainity.Price break-outs are only one of the many indicators you should include in your trading system and strategies.Break-out trading is amethod used by some of the most successful forex traders around.
It is based around the whole premise that if a currency pair is trading in a very tight range for a sustained period of time, then eventually it will break-out of the range and more often than not it will continue moving in the direction of the break-out.
This means that to make consistent profits you need firstly identify instances where a currency pair is trading in a narrow range and then place buy and sell orders at or slightly outside the current range to catch the break-out when it happens.
Furthermore if you want to look for the optimum set-up then you can use technical indicators like 20,50,100 period exponential moving averages to help you.
When the price starts trading in a narrow range and all the three EMA's have flattened out and also currently lie with in this range , is a perfect break-out set up.Why?
Well because with all three EMA's flat something's got to give.It is like a volcano waiting to errupt.Once the break-out occurs you could get a very good movement because the longer term EMA(100) can trend for a very long time so you could get big points if this EMA the price and moves outside of the current trading range.
As regards targets and stop losses you can use the current trading range to determine where you place your stops. So if you go long at the top of the range then your stop loss will be at the bottom of the range.This is only really an emergency stop as most of the time the break out will follow through and not go anywhere near this stop loss.Your target price is usually the same number of pips away as the stop at the very least.
The best thing about this system is that it works pretty well across many different time frames plus not only does it work well for trading forex markets but it is also an equally good system for trading other financial instruments as well.
Break-outs and break-downs are very powerful techniques and can be very profitable if done right.Make sure you have the volume to feel any break-outs that you trade.
Pull back set ups
You need to wait for a strong currency pair to pull back to a comfortable level.Then when it shows signs of strength again that is when you strike.
No mans Land
Don't enter a trade at no mans land.There are zones on chart where there is no reason to enter the trade at all.
Break-out, Break-down failures.
These are also good set-up ie Springs and thrusts.
Polarity change is an underutilised gem in trading set ups
Reversal set-ups. The probability of price reversing increases further it goes in one direction.We can determine these probabilities by using simple charting tools such as over bought/oversold indicators.
Always incorporate good money management rules when trading these set-ups
A valid break-out.A break-out to be valid a price candle must break-out of the range and close outside it.
Step 1. Spot support and Resistance.
Step2. Trade with Price momentum.Wait for a test of support or resistance. Then wait.Watch for the currency to turn away from support or resistance with accelerating price momentum and then execute trade.You are trading with the price momentum and the odds are in your favour. Sure you won't catch the turn exactly and you miss a bit of profit, but if you trade this way and grab 60-70% of the potential overall profit, you will make a lot of money and this is the aim of any forex trading system.RSI is a good indicator to start with.
Step 3. Most major trends start from new market highs not market laws.If prices break-out go with the break. Be careful. You should only do this into strong resistance that is considered valid by the market participants.This will ensure you don't get caught trading false or weak break-out trades.
Step 4 .Take profits too soon.When swing trading in forex, your profits can disappear quickly, so you need to make sure that you get them in bank, when the risk reward is in your favour, recoil in price sets off a counter move.Take your profits early and by this we mean, before they test the next level of support and resistance.
Only trade liquid, volatile major currencies.What methodology should you base your forex trading system on? Consider this fact.Most major trends develop from new market lows or highs and accelerate away from the break-out point.So if you learn to sell these lows and buy these highs when they are broken, you can be in on all the big trends, most traders cannot do this through.Why?Because they want to wait for the pull back and get in at a better price(Buy low Sell high mentality) but they wait in vain as the trend sails across the horizen and they are not in.If you learn how to buy and sell break-outs you can make a lot of money but how do you know if a break-out will continue, of course not all do so, how do get the ones with high odds of success?
For this we need to keep two key points in mind.
1 The more times support or resistance has been tested the more valid it is in different time frames, spaced apart by weeks or months, all the better.This means the level is considered valid by the market and the chances are when the level breaks a new strong trend will develop.
2 With break-out trading there is no prediction, you are acting on the reality of price change and that means no hoping or guessing is involved.You do however need to look at price momentum to confirm the move is valid.
Price momentum should pick up, as the break-out gives way and for this you need to look at momentum osillators, for they will confirm the velocity of price is stengthening and if it is, you execute your trading signal.Once in the brek-out trade, the stop loss level is obvious, behind the break-out point.This method may seem simple and it is but most of the worlds top traders use it and you should too.It is a simple, logical method that is easy to understand and it is obvious why it works.
All you need to do is spot valid set ups on a forex chart and then use a few momentum oscillators to confirm the move .That is it.
The one final point
to keep in mind is, when using brek-outs ,is to be patient and look for
ones that all traders consider valid and these will be high odds
breaks, so be patient.There is a trader who does this, trades only ten
times a year and piled up over 300 percent last year alone.He is not
agenius, he is simply using a methodology that works for anyone and it
can work for you too.