Saturday, 27 August 2011

Forex Training Lesson 2 - Trade a Breakout Like a Pro (B)

In your Forex training programme you should be taught to know when trading breakouts, we are looking for an increase in volume to avoid false breakouts. This means that when the price is breaking above the £10 level (resistance) or below the £5 level (support), the more people pushing prices higher or below that consolidation area the better as this gives Forex traders more conviction to stay with their trades. Also bear in mind that breakouts can and do lead to an increase in volatility and possibly the beginning of trends or reversal of the previous trend.
The reason why breakouts are so popular and profitable is down to the rationale and psychology about the mood in the market, and also the fact that it can be used on any time frame from weekly to a 1 minute time frame.
As was alluded to earlier, it's crucial to identify support and resistance levels. Also, these levels become even more significant the more times price has tested them So, in our case if buyers have attempted to push price above £10 five times in the past, successful Forex traders will consider that a stronger breakout that if buyers tested the £10 level only twice. You should also learn in your Forex training that the best breakouts are those which occur on longer time frames such as daily or 4 hourly timeframes rather than the 1 minute or 5 minute breakouts, as the chances of getting whipsawed, or false breakouts are much higher.
The rules for establishing an entry order for either a long or short position are the same. Whenever prices break above resistance or below support by however many pips, points or cents you choose to assign, you enter the trade. It is also important to be aware of false breakouts, which is where price breaks out of the consolidation zone but then reverses and comes back into the zone without carrying on further in the direction of the initial breakout. Successful Forex traders will look for added confirmation to avoid false breakouts; confirmation could be an increase in volume or waiting for price to close well above the breakout zone.
In terms of where to exit the trade, there several ways to plan your exit target. Firstly, you may decide to use the range of the consolidation zone to set your target. So in our case price ranged between £5 and £10, hence when going long, initial profit target will be at £15. Another idea may be to look to the left of your chart for near resistance/support areas or swing highs or swing lows. How you approach this will depend on the education you have received on your Forex trading course.
Every consistently profitable trader will tell you that losing is part of trading and as successful Forex traders we know when we are wrong we must exit our trade; hence the use of a stop-loss order. Using the breakout strategy, a stop-loss can be set above or below recent swing highs/lows or just above support (when going short) or below resistance (when going long), the idea based on the notion that old support becomes new resistance and old resistance becomes new support. Given that price tends to re-test the area it has broken out of, rather than placing the stop-loss order right on the resistance or support line, it is important to give your trade room to breathe and allow the trade 'work out' and avoid getting stopped out early.
Please click on the link to see an example of how to trade a breakout in this manner.
Visit the London Stone Trading FX Success website for more information on Forex Training or our Forex Trading Course.
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