Forex breakout strategy main techniques for newbies - Singapore Forex Trading, Singapore Forex Academy, Singapore Forex Association

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Forex breakout strategy main techniques for newbies

Classification of strategies is simple: breakout can be differentiated depending on a type of price level:
  • support/resistance levels (including «round» levels);
  • borders of channels (including dynamic);
  • max/min levels;
  • trend line;
  • volatility levels.
Even the obvious fact of break of price level isn't a sufficient trading signal. Any type of breakout requires confirmation by other technical indicators and necessarily volume indicators.
It is always necessary to remember that in any breakout the speculative component is very high, and therefore all Forex breakout strategies, especially short-term options, impose strict requirements to a money management. Trade on breakout without installation of stop losses is strictly forbidden.
Real examples of breakout strategy can be found in network, let's not repeat, we will be limited only to short practical recommendations.
Techniques without indicators
Techniques without indicator are set up on the basis of the analysis of graphical patterns or price designs of Price Action. These techniques are popular among the beginners, but the correct identification of graphical figures requires considerable experience, and therefore use of such techniques is rather dangerous. Moreover, such strategies are not suitable for short-term trade.
Technique on breakout of trend lines
Historically the oldest and stable system constructed on a simple logic: on a bull trend (the line on the ascending max) we look for breakout down, on bear trend (the line on the descending min) — breakout up. This technique works at a timeframe from H1 above and only at trend sites.
Breakout strategies on breakout of price levels
The strong trade impulse is usually caused either by an entrance of large players (for achievement of new price profitable levels to it) or accumulation of trade volumes at the key levels. Price levels (static or dynamic) always exist on any asset and on any period. If taking into account consider that real open interest and the postponed orders are constantly visible to marketmakers and large players, then such strategy is most often used in the speculative purposes.
Example of the medium-term trade strategy of RaminLines on breakdown of price levels
Trade asset: any currency pair. Timeframe: H1.
We open Buy if:
  • the candle is closed above blue level;
  • Stochastics is not in an oversold zone;
  • StopLoss is behind the next lower red level;
  • TakeProfit is lower than the next top red level.
We open Sell if:
  • the candle is closed below red level;
  • Stochastics is not in an oversold zone;
  • StopLoss is above the next blue level;
  • TakeProfit is higher than the next top blue level.

Technique on breakout of moving averages
Classical moving averages of SMA and EMA with the strongest settlement periods (20,50,200) from the point of view of mathematics give to the breakout the additional force – the break and fixing of the price to these levels means an exit from the range – the strongest price levels, and their breakout means an exit from a zone of average value and forming of a new tendency.
Example of trade strategy on breakout of the range
Classical set of the moving averages, with confirmation of a trading signal by means of a slow moving and the modified oscillator. Positions are open on a trend of the senior period.
Trade asset: high-volatile currency pairs. Timeframe: for an entrance – M1, for the analysis — M5. For trade the period with the greatest volatility on an asset is chosen.
We open Buy if
  • the DSS indicator of momentum (an additional window) shows a pronounced bull trend;
  • the price leaves out the limits of the upper bound of the channel of moving averages;
  • the candle is closed above red moving average.
StopLoss is below the next local min.
We open Sell if:
  • the DSS indicator of momentum (an additional window) shows the pronounced descending trend;
  • the price leaves out of limits of the lower bound of the channel of moving averages;
  • the candle is closed below red moving average.
StopLoss is put slightly above the next local max.
Closing of the transaction: the fixed size of a profit or a trailing along red moving average.
Trade technique on a new MAX (purchase) and a new MIN (sale)
From the point of view of the technical analysis the most steady combinations of breakout of power levels and breakout of the price channel. Each extremum shows a new border: maximum price resistance level, minimum price and support level. Price levels are constantly recalculated depending on dynamics of a situation in the market. The postponed orders are usually used.
Technique on breakout of max and min of a previous period
The breakout of the day range is most often used (for example, Linda Rashke's strategy «80-20s»), but in principle it is possible to use any period above H1. The trade is done by two postponed orders: BuyStop is 10 points higher than the previous max (+10) and SellStop is 10 points lower than last min.
Technique on breakout of price channels
The best-known long-term breakout strategy of this kind is Richard Dennis Turtles which fulfills breakout of the 4 weeks channel.
Situations of breakdown of static or dynamic trend channels are most often worked out, but trade on a release in a wide flat can be effective (various versions of channels of Donchian – on extreme values, or Bollinger 's Strips on averages). The analysis of retest of borders of the channel on price history is applied as a check of «validity» of breakdown. The sliding stops on a on lines of borders are usually used for dynamic channels.
Technique on breakout of volatility
This is the one of the options of a swing trade based on the forecast of the future and rather short-term impulse is enough. Practice shows that if the market moves from the previous key level for some percent, the probability of movement in a selected destination increases. The indicator of volatility (ATR type) is needed. The higher is ATR indicator, the more probable is a close turn, the less its value, the trend is weaker and the market is quieter. The entrance to purchase is carried out in case of breakout of the line of the indicator in a zone of limiting border of volatility, and an entrance to sale – in case of an exit for the lower bound.
And as the conclusion …
Breakout strategies have probability of success not above the regular average statistics, but active advertising of the fast earnings with their help makes a deceptive impression. Beginners at first should pick up an effective set of filters of «false» breakouts for the trade system, and also learn to see the operating trend on several timeframe and it is determine correctly the key levels.
The Forex breakout strategies depend on non-standard market factors, technical sliding and speed of execution of orders. All systems of breakout-kickback give trading signals with delay, and therefore the transaction can open on residual movement of the price.