Most often, breakouts are triggered by increasing volatility that develops breaks in the support or levels of resistance. As we mentioned earlier in previous Duksascopy articles, there are times when it may prove to be risky- which is why the breakouts often demand powerful risk management limits to be operative over the future.
Before discussing about anything else, we should find out all the necessary information about Forex breakouts. Breakout can be defined as sudden burst of the currency cost movement in a specific direction after a consolidation period. Generally, a forex breakout is accompanied by the opening of a trend line following tenure of cost that moves in a slanting way. The cost will then shift in a considerable manner towards a direction of breakout and this is the time when you prepare to place a specific position.
Inside day can be defined as one where dealing is included within the range of trading of the preceding day. The breakout scheme involves making an entry into trade on the stop order above and below the wide range which has been in preceding trading with an expectation that since the time a breakout comes into existence, cost will continue to shift in that particular direction.
Most of the volatility breakout systems depend on the idea that if the forex market shifts a particular percentage from earlier cost level, market is probably to find a follow through towards that particular direction. In this type of situation, you are searching for an extension of a move depending on the momentum.
One should search for a sequence of inside days in order to implement this particular strategy and the greater the amount of the inside days that emerge, the higher the possibility of breakout.
In addition, the longer the timeframe utilized, the stronger the opportunity of breakout – hourly and regular timeframes are the best to use. Certainly, there will be large numbers of false breakouts as dealers of interbank try to start stop orders outside the levels of breakout.
False Forex Breakouts
In certain cases, resistance or support can start breaking just to notice cot moves against us in a direct manner to the stop. It brings an idea of “false breakout” where the major level is shattered without cost continuing to shift in that particular direction. A false breakout can be plentiful and as we are aware of the fact that most of the breakouts will take place around the volatile periods in a trading market; breakout dealers want to opt for risk management in order to lessen the damage caused by wrong breakouts. It is the place where the stop-loss order and powerful risk management can prove to be helpful.
Generally, false breakouts are defined as a movement of the cost which appears like starting a totally new trend but rather than enduring the movement in that specific direction, it is contrary and then shifts back in an opposite direction. However, after making an entry into trading, dealers would find the cost shifting back, turning your gain into huge losses in a short span of time. If you want to avoid such losses, you should know how to deal forex breakouts in a successful manner.
Breakout Strategy description
Step 1: We will go to the Daily/High Lows Dukascopy page and watch the major pairs. We need to look for a high volatility forex pair. While trading pairs of currency with the less volatility, it is common to encounter wrong breakouts. Thus, it is considered as best for the traders to be careful for the pairs of currency that are not volatile while trading breakouts. In conclusion, breakout exchange is a popular strategy used in Forex trading. Breakouts take place in a frequent manner on the currency charts. It does not matter whether the breakouts are true or false, it is really difficult in implementing this method. We can see high amplitude for EURJPY forex pair.
Step 2: Let us open the EURJPY chart and see daily high low and high. For this strategy we will watch 30min. chart timeframe. On this chart, we need to add ATR (Average True Range), RSI (Relative Strenght Index) and Bollinger Band indicators, as well as the important Fibonacci levels.This Fibonacci levels I will use only to calculate target price level.
Predicting movements of the currency pair with ATR depends on a similar principle just like other volatility indicators including high value of ATR. The higher the possibility of a shift in the trend, the lower the worth of ATR and the weaker the movement of the trend is. Nowadays, we are searching for a possible breakout.
Based on daily EUR/JPY ATR indicator, we realized that the last couple of days volatility was very high (yesterday around 140 pips) and ATR for last 14 days is around 92 pips.In In this moment, RSI on 30 min. chart is around 70 and shows divergence.
Step 3: Find out an entry point:
For trading breakouts, traders at first should find a valid resistance and support level. The main thing that a trend line does is it shows the path on which the wide range of costs is at present moving and permits one to use a device to know the way of breakout. It is suggested to wait tolerantly for the cost to come back in order to resist breakout before they make an entry into trading. This also helps in lessening the chances of being “stop” because of the false breakouts.
Once a trader recognizes the resistance and support levels, a trader should have a look at them and find when the cost breaks the resistance and support level. For entry point, I always choose the important level as daily high or low, monthly high or low. Today I will make sell order at 109.5 because this level is daily high (based on Dukascopy High/Low page and chart) and I see RSI divergence in this moment.I will make sell order when RSI breaks below 70. Traders should never hesitate to trade instantly following a breakout as it is regarded as fake. They should have patience to see whether the cost will endure a direction or not. Most of the traders can set a bullish position once the cost breaks out of the resistance level and bearish position once the cost breaks out from the support level.
Step 4: Make a plan for proper target and exit: Once a trader figures out the new resistance and support level, he or she should watch the way towards which the forex trading market moves. In addition, it is significant for a trader to make a proper plan to exit. I always fix stop losses by real resistance or support level. In this case, target will be 23.6% Fibonacci level 108.71. My tight stop loss will be 35 pips and my profit will be 70 pips. If you see that price goes up above entry price level and RSI divergence line (red line on picture) is broken than I will exit. So I can close position before than I reach 35 pips stop loss.
While planning to deal with volatility, it can assist greatly to imagine the surrounding in which all of us are looking forward to take part. Breakouts originate from various ranges. Most often, these ranges will populate at the time when the traders are not sure about the direction of costs in future. An important news release or an announcement of economic data; when the Forex traders can observe wide range bound costs going for release as the best example of such situation. Very often, breakout trading chances occur in the currencies. In order to earn huge profits by using this particular method, traders should learn how to increase profits, minimize the losses and also identify the highest possibility potential breakout deals. As a breakout with powerful momentum can possibly yield an unlimited deal of various pips for the small amount of danger involved, large numbers of Forex traders settle instantly to trade breakout. However, a trading breakout is not as simple as it looks. The reason behind this is most of major breakouts that take place in forex trading market have a tendency to be wrong breakouts, trapping the dealers who hurriedly grabbed this opportunity.