The Breakout Strategy is one of the most used strategies by professional and successful traders. Despite the fact that it is utilized by experts, it is extremely easy to implement, using technical analysis that are regularly updated and which are readily accessible online.
What is a Breakout?
A breakout is any movement of price outside a defined support or resistance region. Breakouts occur anytime in the forex market if a price breaks above or below a resistance or support point. The breakout can happen at a horizontal level or a diagonal level, depending on the pattern of price action.
What is Support and Resistance?
Support and resistance are specific levels or zones on the trading chart, where the price of a Forex pair is probably going to find opposition.
Below is a graphical illustration of Support and Resistance;
For breakout strategy, we need a trending market and these trending markets are especially common around the openings of the currency markets; London/New York mainly. A breakout can likewise happen when a particular price level is broken such as support and resistance levels, channel line, etc.
We have different types of Breakouts;
- Support and Resistance level (zone) Breakout
- Channel Breakout
Support and Resistance level (zone) Breakout
Support zone is that zone or level on the chart where there is a reversal in downtrend. It is also a zone where the price can be prevented from dropping further.
Below is an image showing the Support zone;
Support Zone Breakout: Breakout occurs when the market price breaches (break through) the support zone. This type of breakout is known as Bearish Breakout. You can open a Sell order immediately the market price breaches the support zone.
Resistance zone is that zone or level on the chart where there is a reversal in uptrend. It is also a zone where the price can be prevented from rising further.
Below is an image showing the Resistance zone;
Resistance Zone Breakout: Breakout occurs when the market price breaches (break through) the resistance zone. This type of breakout is known as Bullish Breakout. You can open a Sell order immediately the market price breaches the resistance zone.
What are channels?
Channels are lines that are made on a chart to show the range in which a currency pair has been trading over a specific amount of time. They are very simple to create. By observing the chart over a timeframe, you essentially draw a line connecting the relative high point trading prices, and a different line beneath it connecting the relative low point trading prices. What you’ve done is created a perception of the trading range that has been happening over the time span being referred to, for instance, six weeks.
Channel Breakout – When the price of a currency transcends (rises above) the top channel line, this is an upward channel break. On the other hand, if the price of currency falls underneath the base (bottom) channel line, this is a downward channel break. Channel breakouts can and do happen on the upside and downside. Through appropriate Forex training in technical analysis, anybody can utilize this technique to build up a successful currency trading strategy.
It is essential to draw the channels appropriately, as not every crossing of the lines becomes a true breakout. Also, if the channel lines are improperly drawn, you frequently observe trading outside of this range just to return inside. That is the reason it is significant for anyone to complete a thorough Forex education before he/she starts trading.