Forex Strategy Tutorial: Breakout Trading

Forex Strategy Tutorial: Breakout Trading

Over the last few years, technical analysis trading in the forex markets is something that has risen to prominence.  When we are thinking about technical analysis, one for the first terms that comes to mind is the breakout strategy.  This is a highly valuable strategy in terms of the ways it can allow traders to view the market and to spot new trends as they are starting to emerge.  Breakout trading requires a few different steps in order to be completed in a productive manner but once these steps are mastered breakout trading is a relatively simple technique that can be repeated on a daily, weekly, or monthly basis.

Breakout Approaches

According to recent reports from Mocaz, traders looking to conduct a breakout strategy, the first step is to identify an important support and resistance zone.  This requires the use of other techniques that might not be completely familiar to new traders.  But if you are somewhat familiar with the process of technical analysis in forex trading, this is likely a skill you have already mastered.  Support and resistance levels essentially refer to areas where buyers and sellers have entered the market at specific price points in the history of an asset.  These are the areas that are used to define situations where breakout points might occur in the market.  

Once these breaks occur, forex traders can then take a trade in the direction of that break, either in the upward or downward direction.  So if we see a break of a resistance level, it makes sense for forex traders to begin considering long positions for that asset.  If we see a break of a support level, it makes sense for forex traders to begin considering short positions for that asset.  This is how the mechanics of the trade work but there are some important implications that traders should understand once this type of scenario starts to unfold.  Essentially, this means that the old trend is ending and a new one is beginning.  

In other words, the new trend is “breaking out” and it then makes sense to start taking new positions in the direction of the break.  In these cases, market momentum is starting to build and this is what causes the breakout itself.  Breakout traders, it can be argued, will then turn into momentum or trend traders so there is some difference in the ways these price moves are viewed once they complete.