The Foreign Exchange markets hold a number of attractions for those looking to make additional money. As a result there are a number of strategies which have been developed which can be used to identify and capture profitable moves in a currency pair. One of the most popular is the breakout strategy for Forex. This trading method holds a number of advantages for the trader. It is not only one of the most simple to understand but can yield high levels of profit if implemented correctly.
The breakout trading strategy is so named as it looks to capture the movement in a currency pair after it has broken through a prior identified level on the chart. This can be either a level of support or resistance to the most recent price action. What is important is that this level has previously constrained the price movement of the currency pair on the chart. This makes it more likely that when the level is broken, that market momentum will continue to push additional moves in the direction of the break. This is the movement on the chart that the breakout trader seeks to capture.
The attraction of trading chart breakouts is that they can lead to high profits. The move following the initial break is often big, allowing a high number of 'pips' or profits to be booked. In addition they are a relatively simple system to trade. The individual can work out where they are going to place their price targets on the chart prior to the break happening. Position of stop levels can also be made in advance. This allows the trader to set up their orders in readiness of the break and without needing to make spontaneous decisions in the live market that many forms of trading require.
The one downside to this method comes in the form of what is referred to as 'false breakouts.' This is when a break in the market looks set to occur but actually fails. In this scenario the market quickly reverses and moves strongly in the opposite direction of the expected market breakout. If the trader experiences this too many times they can suffer a big hit to their profits. However there are a number of things that can done to ensure that this risk in minimised.
The best way in which to implement a successful breakout strategy is to wait for confirmation of the break. Opening your order only once the identified break point has been firmly broken will help to protect from these false moves. By positioning the enter point for the trade a margin of pips above the identified break point, the trader will help to ensure that their trades are not triggered on any false moves. Similarly by placing a tight stop loss on each order placed, a quick exit from a breakout that doesn't follow through will be ensured. This will help to minimise any loss that is incurred when the follow through momentum in the market is not present.
Implementing a well thought out strategy to capture breakouts when trading is one of the most profitable approaches you can use to profit from trading on Forex. You will however need to ensure that you don't jump too quickly into moves and that you are prepared to exit the market quickly if the expected move does not occur. One final tip is to ensure that you trade at times when the level of market activity is at its height. To have the best chance of capturing strong chart moves you will need sufficient volume to ensure there is enough momentum to carry the move. If you follow these guidelines you will have a winning strategy to trade with.
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