Trading breakouts is one of the most popular Forex trading strategies out there, the reason is simple. Breakouts trading offers the most comprehensive and often-repeated opportunities, however, nothing is perfect, you have to be careful not to get tricked and trade in the wrong direction. For that you have to ALWAYS appoint a Stop Loss point.
Anyway, here is how you trade chart breakouts
Note that this example is traded on a bullish breakout, you can certainly apply the same trading strategy on bearish breakouts as well.
As usual, check your trend bias. To apply this trading strategy you should find a good ranging market, or a market that is not having too much bias for neither bulls nor bears.
Locate the previous highest point where the market has reached lately, notice that in this example (in the pictures below, the market was hesitant forming long candlewicks about 100 candles earlier or so. This same level has been visited once before too, that’s why I am taking it in account.
Notice that the price is supposed to respect the resistance area, but you will find later on that it didn’t.
In this case we wait and see what happens, if price falls again and goes through the same ranging market circle, we would just wait for another chance of a breakout, and while we are waiting we can still trade the range bound market and place all our trades in the direction of the trend (the trend we had before the ranging market occurred).
It did not fall, it did go straight up and made a small breakout, however we won’t count on this, we will just wait further and see how the next candle will be looking like.
The candle close above the resistance level which is a good sign, some traders would enter now, however more conservative traders like myself need to see one more blue candle to form and close above the resistance.
Now that we have a confirmation with a wonderful blue candlestick, we can now enter our trade and expect the price to go further with the same bullish bias.
Notice that you should usually place your stop a couple of pips below the resistance level. If you prefer to place your stop somewhere else go ahead and do it, but in all cases please DO place a stop.
As you see, the price has gone up for over 500 pips, far more than what I ever thought.
Remember that you don’t have to do this with a bullish breakout, you can trade breakouts both ways.
Always enter the trade when you are 100% sure of what you are doing, there are tons of currencies out there in Forex world, you do not have to trade a particular pair if the market is not clear. And it is a very good idea to always wait for price back testing to make sure you are doing the right thing.