There are countless trading strategies that can be employed in Forex, and among them, the breakout strategy can prove to be the most valuable ultimate strategy.
When the market price exceeds the pre-judged transaction price, the price will break through. This could be a breakout of support, resistance, technical price data, or an overnight trading range. Regardless of what triggers a breakout, a breakout is when price action penetrates the relevant price level and enters a new trading range.
A successful breakout must be accompanied by rising volume. This is because, if the volume does not pick up, the breakout will likely fail due to lack of momentum. The term false breakout is when the price breaks out first, but then doesn't have enough momentum to support it higher.
So why should we assert that breakouts can prove to be the ultimate forex strategy? Perhaps, one of the most obvious reasons is its potential to generate high returns. The strength behind the breakout has the potential to bring a certain number of points of profit. The speed and dynamism that come with a strong breakout can be one of the most profitable ways to create an account.
However, breakout trading has many other advantages. These advantages make breakout trading beneficial to both novice and experienced traders.
Advantage #1
The main advantage of breakout trading is that it allows you to plan your trades ahead of time. You can identify key price levels for potential breakouts by analyzing the charts. It helps you cut through market noise and develop a trading plan. Plus, it will give you plenty of time to look at different time frames and cross-reference fundamentals that might influence a potential trade.
The beauty of this approach is that it helps you maintain good self-discipline. Having a solid plan and being well prepared for your trading will go some way to preventing you from making hasty trading decisions. It will help you develop the framework and structure of your overall trading plan.
Advantage #2
One of the advantages of identifying potential trading opportunities in a position beforehand is that you are also able to calculate the potential risk reward ratio for each trade outcome. This provides an important metric to help you assess the performance value of each potential deal.
Successful trading depends largely on the balance of risks. When you identify a breakout point that you intend to trade, you can also try to identify areas where the market is likely to enter. At this point, you may want to close your order. Likewise, you need to identify positions where you can place a stop loss. If the expected breakout does not occur and the price does not reverse, you can exit with a stop loss.
After identifying entry, profit-taking, and exit levels, you can calculate the risk-reward ratio of the trade. This will show if the trade is worth the risk for you, and eventually allow you to pile up your profits.
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