What is a Forex Breakout Strategy?
Forex breakout strategies are when a forex trader will look to buy or sell currency pairs when the price breaks through key price levels, mainly support and resistance. The market can tend to move significantly when price breaches important price levels which makes breakout trading a popular choice for investors of all experience levels.
Those who are trading with a forex breakout strategy tend to use the 1-hour chart time frames and above as the support and resistance levels tend to have more importance, primarily due to the fact they are over a longer period of time and watched by many traders, including the big players. I tend to find that the lower chart time frames can contain too much noise and therefore presents too many false breakout trading signals.
Forex breakout trades when day trading can last for a few minutes or hours usually although some traders will use a breakout as an opportunity to enter a long-term swing trading position that is held for days, weeks, months and even years. This makes forex breakout trading a flexible strategy which can be adapted to individual trader needs.
What are the Advantages of a Forex Breakout Strategy?
With so many currency pairs to choose from and multiple chart time frames, there is always the possibility to look for key price levels where there may be a breakout trading opportunity. This is great for those who do not have much time to dedicate to trading. Not only do they apply to currency pairs but they can be used on any trading instrument.
You can even set alert notifications via email or SMS and pending orders at the levels you anticipate a breakout. This will save you from having to constantly stare at the charts all day waiting for price to breakout.
Breakout strategies can be very easy to use once you know how to mark support and resistance levels on your chart. There are even dedicated breakout indicators that can help mark these levels on your chart. There are no grey areas with breakout strategies as the levels should be clear. When using other strategies that rely solely on lagging technical indicators, these can be too open to interpretation and not reflective of what price is actually doing here and now.
Breakout trading strategies can be used for short and long-term trading. They can often lead to trade setups with favorable risk to reward ratios due to the momentum breakout trades can gather. If price doesn’t break out, it doesn’t take long to realize this at which point a trade can be exited and a possible reversal trade considered.
If you can scalp the forex market successfully, there is the potential to compound an account as you are frequently increasing your equity. If you are taking long term trades you may need to wait for them to come to fruition before compounding.
Fundamental factors can work in favor of breakout strategies. If there is a major news release that occurs at the same time or around a breakout, this can increase the momentum and give traders the opportunity to catch some big moves.
Price levels that can be used for breakout strategies are the same across all time frames. This can give them more relevance especially when compared to technical analysis that can give conflicting signals depending on the time frame you are applying an indicator to.
What are the Disadvantages of a Forex Breakout Strategy?
Forex breakout strategies can perform poorly if traders are not using significant enough price levels. I have often seen beginner traders using lower chart time frames and multiple support and resistance levels that have not been tested enough and are not being watched by enough market participants to give them enough importance.
Forex breakout strategies may also be more susceptible to broker slippage. Due to the fact that price can often move quickly through support and resistance levels, it can mean that trades are not always executed at the ideal price. This can lead to entering positions further away from the breakout point than anticipated. I would personally prefer to use an ECN forex broker in order to get trades executed at the best possible prices from their liquidity providers (LP’s) with reliable execution speeds.
If the breakout trader is not using sensible money management and does not plan stop losses effectively, a breakout trading strategy can cause them to be whipsawed in and out of the market. It is important to realize that not every single breakout trade will come to fruition and there will be losses which is a completely normal part of trading any forex strategy.
If for instance, the stop loss is placed just below the resistance on a breakout buy trade or just above the support on a breakout sell trade, there is a chance that the trade is taken out prematurely as the breakout level is tested multiple times.
I would look to place my stops on a previous high or low and give the breakout a chance to prove itself. Furthermore, I would only take breakout trades that give a favorable risk to reward ratio of at least 1:3 so that one losing trade does not wipe out multiple winners.
Forex Breakout Strategies
There are thousands of forex breakout strategies that you can find online. You can also use the technical indicators built into trading platforms to create your own breakout strategy template that suits your individual trading style. The primary concept of breakout trading is to mark key price levels and then look to enter the market in the direction that price breaks through these price levels.
Support & Resistance Breakout Strategy
This is the most basic forex breakout strategy that anyone can use. You simply mark recent highs and recent lows on the chart, these then become support and resistance lines. The more times that price rejects these levels, the more significant they can become.
- Mark highs and lows on chart (support and resistance)
- Wait for price to break through one of these levels or place pending order
- Enter the trade in the direction of the breakout
- Place stop on previous market highs or lows and aim to take profit once the breakout has come to an end. Some traders may also lock the trade in at break even and stay in the position longer to try and gain additional pips. You should of course adapt money management according to your own trading style as everyone is different.
Pivot Points Breakout Strategy
Pivot points are horizontal support or resistance lines in the chart. There is the so-called main pivot point and two additional (some programs also use three) support and resistance lines. You can download free pivot point indicators online and add them to your trading platform. One key thing about pivot points is that many big players use them so the levels can have added impetus.
- Place pivot points indicator on chart to mark levels
- Wait for price to break through one of these levels or place pending order
- Enter the trade in the direction of the breakout
- Place stop loss and take profit around other pivot point levels
Fibonacci Breakout Strategy
The Fibonacci levels can be used to find areas of support and resistance. Around these levels, we can look for price to breakout. The key Fibonacci retracement levels to keep an eye on are: 38.2%, 50.0%, and 61.8%.
- Mark the Fibonacci levels on your chart using the Fibonacci retracement too
- Wait for price to break through one of these levels or place pending order
- Enter the trade in the direction of the breakout
- Place stop loss and take profit around other Fibonacci levels
Forex Breakout Strategy Conclusion
Forex breakout strategies are very popular and easy to trade. They require minimal time to find potential price levels which price will break through and you can even set pending orders or price alerts so that you do not need to chart watch whilst waiting for the next signal to appear.
If you are looking to trade forex online, you will need an account with a forex broker. If you are looking for some inspiration, please feel free to browse my best forex brokers. I have spent many years testing and reviewing forex brokers. IC Markets are my top choice as I find they have tight spreads, low commission fees, quick execution speeds and excellent customer support.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
