Sign In with Google
Sign In with Facebook
This forex strategy tries to exploit the times when the market is not trending. In essence, it rests on the statistics which show that the Forex market is trading in a range for about 70% of the time and it’s trending only about 30% of the time.
Since price fluctuations are very unpredictable and irregular while inside of a ranging formation, it’s better and wiser to trade on a breakout of that ranging formation instead of trading it.
The breakout confirmation strategy aims to profit on such situations when the price moves out of the range and as a result, usually follows a more predictable path.
Still, we can not go blindly and trade any breakout that we find on the charts. In fact, the truth is that most of the breakouts in the Forex market are fake and you will actually lose money if you are not very experienced in trading breakouts.
That’s why a specific set of conditions must be met in order to increase the chances of making a profitable trade.
Conditions of the Forex Breakout Confirmation Strategy:
Note : The mechanics of this strategy can be also successfully used in determining true breakouts in single trendlines (without a range or a channel). However, a break of a simple trendline has proven to be less significant than the breakout of a channel or a range. Therefore, trendlines are not included as a condition in this strategy.
Entry rules:
AUDUSD 4h chart upward channel breakout and reversal - The breakout is confirmed and price action follows through to the downside!
Initial Stop Loss Placement:
One of the best parts about this strategy is that it usually provides very tight stops and big profit potentials.
The stop loss should be placed right behind the retest of the broken trendline. That is:
- above the retested highs in a downside breakout (look at AUDUSD chart example above); and
- below the retested lows in an upside range breakout (look at USDJPY chart example below)
USDJPY 4h chart - Horizontal range upside breakout (the blue circles mark the defining points of the range – each time the trendline is touched)
Targets and Take Profit Rules:
For a horizontal range
Measure the height of the range and project it from the point of breakout. 4 possible targets can be calculated in this manner:
1st target – 0.5x the height of the range
2nd target (most probable outcome) – 1x the height of the range
3rd target – 1.5x the height of the range
4th target - 2x the height of the range
It’s best to take profit on part of the position at each of these targets or use a trailing stop after the first 2 targets are reached.
For a sloping channel
Measuring and projecting the height of the channel is not as reliable as with the horizontal range. That’s why it’s better to target major support or resistance levels instead. Zoom out on a timeframe that is 1 degree greater than the setup chart.
Look for past support or resistance levels beyond the breakout and use those as targets.
If no prominent support or resistance levels are present, use Fibonacci retracements and extensions to determine important price levels.
Note : If the appropriate target level (support or resistance) is too close to the entry point then trades should not be taken.
Downward channel on AUDUSD 4h chart - The retest of the broken trendline can happen much later after the initial breakout. It's still a valid signal.
Conclusion
This forex breakout trading strategy is little more advanced and requires experience of drawing the channels, recognizing ranges and Price Action patterns. However, once you master it, you will become the real professional Price Action trader.
