Forex Market Entry Strategy Based on Breakout
Trading on a breakout (breaks at a price level) can be a high risk if not done properly. This article is the experience of Sam Seiden, a trader, fund manager and trainer on how he applied this breakout strategy with high probability and the lowest possible risk.
Many traders are emotional with breakout strategies so this simple and profitable strategy becomes risky and stressful.
Before discussing this strategy, it is important to know that there are two key elements in the forex market, namely:
- Why is the price moving? Yes, price movements in the forex market occur at a level where supply and demand are out of balance. An experienced trader can profit consistently because he can identify the imbalance between demand and supply in the market, or in other words he knows where buyers and sellers are in the market.
- Who is on the other side of your trading? Forex trading can be simplified as the transfer of some funds from traders who do not know what they have done on their trading account to account those who know for sure. Traders who can profit consistently know that beginner traders are on the other side of their trading.
Note area A in the picture below. A is the starting area of a strong price rally. Most traders with a breakout strategy will enter the market after the price breaks (break) area A.
They wait for the price to penetrate area A and new entry buy may be after the price is far above level A. Although in forex trading is not justified the assumption that the price is too expensive or too cheap, but logically when the price moves through area A, there is an imbalance between demand and supply, in this case that dominates the market is the buyer. Experienced trader waits until the price returns to its original area (area A), and occurs at point C. This point is the previous price level of balance that has ever happened, and experienced traders immediately open buy position at point C. They also know that they buy from beginner traders who generally enter the sell position at point C where the demand should exceed the supply as it did when the price penetrated area A.
The indicator used to identify the trend is a simple moving average of 20 periods. Then look for and find the area where there is a balance of demand and supply, ie the area of origin of a strong price movement (up or down). Create two parallel lines at the top and bottom levels as a price balance area. To target profit (reward level), set the highest point before the price returns to area A at point C, in this case the profit target can be set at level B.
Once you have determined the size of the lot (position size), you can open buy at point C with stop loss at the level below the area line (bottom black line in the picture). Target profit at level B.
This breakout-based market entry strategy applies to all time frames, although of course the higher time frames will be more accurate. If you are accustomed to trading on a low time frame, you should make sure the balance area you make is confirmed with a higher time frame.