Entry Breakout Techniques In Forex Trading
More than just a Following Trend strategy, Breakout techniques in forex open up opportunities for maximum profit. How to entry trading with this technique?
Trading on trending market conditions is strongly profitable. Trend Follower always observes the direction and strength of trends to get the most appropriate entry opportunities. But do you know, if the best way to get the maximum profit from the trending condition is being strong is the technique Breakout?
What is a Forex Breakout Technique?
Breakout in forex is basically price breaking from important level , such as highest price (High) or lowest (Low), Support Resistance, Supply or Demand Area , up to psychological level. Here is an example of a strong Downtrend situation and is characterized by the formation of Lower High levels (Lower High level) and Lower Low (Lower Low level).
After penetrating the first Low, prices slid down and recorded a decrease of 582 pips, calculated from the peak of the third High.
If measured by the tools available above, the price decline since penetrating the Support reaches 5.93% or about 725.4 pips . Amazing, is not it? Thus, it can be concluded that price movements that can penetrate important levels tend to continue in strong trend forwarding.
Compared to the Trend Following trading mode that relies on the temporary end of the correction signal, the forex breakout technique is more promising, as it is usually driven by market psychology that universally acknowledges the potential for significant movement after penetration from the important level.
In addition, trend forwarding that occurs after the end of the correction is usually temporary, or easily returns to corrective movement when the market fails to maintain sentiment. This is certainly different from the tight movement after Breakout, as the price will usually continue to slide in the trend before it starts to correction.
Trading With Breakout Technique
In the Breakout technique during Downtrend, first determine the Support level, then the lowest level (Low) at this time . If the downtrend is strong, then the price will definitely form a new low to allow the Downtrend to continue. The most effective technique for Entry Breakout in these circumstances is to use the Pending Order , ie Sell Stop or sell below the current market price. The entry level (sell) should be determined below the current low.
As for Breakout Uptrend, find the last Resistance and High levels . Then use the Pending Order Buy Stop to open the buy order above the current price.
To be more precise, you can use a lower Time Frame , in this example eg 4 Hour Time Frame (H4).
The chart above is the H4 version of the EUR / USD D1 chart in the previous example. Lowest close before Breakout is seen at the level of 1.22156. Thus, the way the trading entry is applied is by targeting the price range below that level. How far is the distance between the entry points with the last Low, decided depending on your trading style, whether aggressive or conservative (defensive) .
If you follow the principle of aggressive trader, then the target of sell entry with Pending Order Sell Stop can be placed as close as possible from Low 1.22156, possibly follow the minimum distance ( Stop Level ) specified broker. But if you are a conservative trader, then the entry could be further than 1.22156 or even wait for confirmation first, whether from Price Action signal or technical indicator.
Another entry way of trading in Breakout technique is to find strong support below the last Low level (1.22156) . The trick, you can slide the chart to the right to get a wider picture of price movements.
The second support seems to lie in the 1.21785 range. You can install the Sell Stop entry target in that range, then specify the exit points by setting Stop Loss and Take Profit according to your ideal Risk / Reward Ratio . Say you adjusted the Stop Loss based on the last Resistance, then the possibility of SL is in the area of 1.24162. With a 1: 2 ratio, Take Profit will take place at 1.17031.
Watch out for False Breakout Traps
Although the breakout technique in forex is very promising, it does not mean there is no risk to watch out for. Every strategy always has weaknesses that need to be taken into account, as well as this Breakout technique. Many traders who feel attracted to the technique of Breakout in forex are often fooled by False Breakout, that is when the price has penetrated an important level but then it reverses course and does not continue penetration .
This is why, putting the Pending Order in the proper way of trading entry is very important . This is the reason why conservative traders do not like to place the entry too close to the last Low. In this case, the way of trading entry with next price support can quite eliminate the False Breakout trap in forex, because the area is an important range that is difficult to be broken by just a corrective move, or when the price is not supported by strong momentum.
You can also avoid the risk of False Breakout with several alternative ways, among them are:
- Look at the larger Time Frame . If Breakout also occurs in the larger Time Frame, then the Breakout validity will be more confirmed.
- Confirm with Price Action . Notice what candlestick patterns are formed at an important level that prices are trying to break. If the candle forms a reversal pattern such as Pin Bar, Doji, Engulfing, and Three Inside (formations in the Bull Trap pattern ), it is advisable to prepare entry trading with a reversal strategy or not enter the market at all. To be able to entry with Breakout technique, confirmation with the shape and color of the candle in the direction of its Breakout. If Breakout upwards means wait until 2-3 bullish candlesticks are closed above Resistance. Vice versa for Breakout downwards, can be confirmed with some bearish candle under Support.
- Use helper indicator . There is no harm in using signal indicators to anticipate False Breakout. You can instead take advantage of the usability of indicators to display graphs that represent the mathematical calculations of past price movements. Types of indicators that can help you avoid False Breakout are Oscillator (RSI, Stochastic, CCI, MACD, etc.) and ADX; Oscillator because it can show momentum, ADX because this indicator can show trend strength . The principle is easy, if the momentum or strength of the trend rises, then the price still has the impetus to continue the trend. But if the momentum or trend strength looks weak, then you should not consider to process entry trading way with Breakout technique, even if the price seen will penetrate an important level.
Passing one or two seemingly dubious chances will be better than taking all opportunities with unstable accuracy. However, you must set and adhere to certain restrictions in taking Breakout signals in forex, if you want consistent trading results.