There are a lot of trading strategies available on the internet. Most of them are profitable. To remain successful in the Forex market, you have to choose a trading strategy that has consistency in profit-making. As we know the overall market goes through several stages there are some trading strategies that work well while the market moves on a breakout.
The Forex market is always open 24/5 and most of the major market participants here are central banks and big financial institutes. When they operate the trading activity in the over the counter market, it comes through us in the retail market through a Forex broker. Big players in the Forex market play with millions of dollars and they spend a lot of money on analyzing and education. Therefore, they are able to predict the market accurately and can create a strong breakout in the market.
Why Breakout Happens in the Market
In a perfect market condition, buyers usually buy when the price reaches the support level and sellers take their selling position as soon as the price reaches the resistance level. As a result, it forms a range market.
After forming a range, the market breaks out with impulsive pressure on either side. It creates panic among the buyer and sellers. Therefore, they set their memory that the price would react the same if rebounds the level again.
The main reason for the breakout in the market is that the major market mover accumulates order before moving the market towards their side. As big players trade with millions of dollars they do not risk all of their money at once. Instead, they take their positions in various steps. When their step completes the market starts to move and the speed of the breakout represents the power of the market participant.
Forex Breakout Trading Strategy
In this section, we will see a trading strategy based on the market breakout. As we have seen earlier that the power of a breakout represents the strength of breakout. In that case, we will consider the breakout that has strong momentum only otherwise, there is a risk that the market might rebound by making a false breakout.
Let’s see the breakout trading strategy in a step by step approach:
#1 Understand the Market Context
According to the market context, the following scenario might happen in the market.
- After an impulsive momentum, a correction is likely to happen.
- After a correction, an impulse is likely to happen.
- In impulsive momentum indicates the continuation of the current price action
- The corrective momentum indicates the reversal of the current price action
Therefore, for breakout we need to consider the following market scenario only:
- If the breakout happens after a correction towards the previous impulsive momentum, the price may continue towards the direction of the impulse.
- If the price is not backed by any impulsive momentum, the breakout may convert into a false breakout.
#2 Identify the Breakout
After understanding the market context we are now aware of a strong and false breakout. In this section, we will see how a breakout happens.
- The breakout should be from an important support or resistance level.
- The breakout should be strong compared to the previous price action.
- A strong daily close after a breakout would indicate that traders from previous days trading sessions are likely to hold the price for further movement.
After confirming a successful breakout it is time to enter the market.
#3 Enter the Trade
As most of the strong breakout happens with a longer candle compared to the previous candles the risk: rewards become challenging. Therefore, traders need to wait for the price to come back to price a good R: R.
- Enter the trade after a good amount of correction.
- The counter should be weaker and corrective compared to the power of breakout.
- After completing the correction we need to see an appropriate candlestick pattern to form either in intraday or daily timeframe.
- Make sure to enter the trade after closing the confirming candlestick pattern.
#4 Take Profit and Stop Loss
After entering the trade the main challenge is to manage the trade. In trade management, most retail traders fail to handle it.
- Take profit should be based on the power of breakout. If the breakout is very strong and backed by the impulsive momentum the price is likely to break next resistance or support levels.
- Always make sure to close the trade before any important support or resistance levels appear.
- The stop loss would be below or above the entry candle with a minimum of 10-15 pips buffer.
- For a volatile market condition, make sure to extend the buffer and make the trade risk free as soon as it moves to the satisfactory profit zone.
The Forex market is associated with a lot of risk and uncertainty. Therefore, everyone should be careful while trading. There is no trading strategy that can guarantee a 100% profit in the market. Therefore, using appropriate money management is key to be successful in the industry. Moreover, make sure to use lower trade volume to minimize the risk per trade.