FX FOREX 3- THREE DIFFERENT PRICE ACTION BASED BREAKOUT STRATEGIES

The forex breakout strategy is one of the most common and one of the most reliable strategies that successful forex traders implement. Traders who trade on price action movements, will enter the breakout trade at different times and will follow different rules of entry, exit and stop setting. Nearly all successful traders incorporate breakout strategies into their trading plans. There is no "one correct way" to trade breakouts, of course, so you will need to discover which method is the best for your, personality, and the level of risk and patience you are able to provide while waiting for a breakout to occur!

First, let's review what a breakout is. In general, a breakout is when a currency pair makes a move across a support or resistance point. It "breaks through" the support or resistance level.

In price action based trading (trading that does not rely on the over-use of technical indicators); there are 3 different ways that are recommended to identify and take a breakout trade:

1. Look for a period of consolidation in the currency pair, then enter during the consolidation phase. In my opinion, this is the most risky approach. When you enter a breakout during consolidation, you really do not know which way the currency pair will move. In my opinion, by entering during the consolidation phase, you are starting with just a 50% probability of getting the direction of the trade right. Then you have to add in the other factors such as setting a large enough stop loss which is another factor that can decrease the probablity of the trade going as expected. So all in all, in my subjective experience, I would claim that this is one of the least probably ways to take a breakout trade.

2. The second way is to determine the upper and lower points of the consolidation range. Then wait for the currency pair to actually break through one of the points. Then immediately, or after a very short time, get into the trade in the direction of the breakout. This strategy is less risky, in my opinion, because you have waited for some confirmation of the pairs' direction. False breakouts can always occur; however, when you use this basic strategy along with setting appropriate stop loss, limit taking, and reversal rules, you can expect to increase your "win" ratio to 70 or 80% and sometimes even higher.

3. The third way I will mention is similar to method 2 above. Again, you start by observing the pair in a period of consolidation. Next you wait for it to break through one of its support/resistance points. However instead of taking the trade immediately upon the breakout, the trader will wait for a "pullback" and then take the trade in the direction of the breakout. The main concern I have with this method is the potential for "lost opportunity." In other words, the pair may not perform a "pullback," and you would then miss a big move waiting for a better entry point.

Obviously I have a preference for which of the 3 methods I like to trade. This does not mean that my strategy is the best one for others. Take some time to implement the different ways of entering a breakout trade on a demo account and see which one fits your "trading personality" the best