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Key Facets of Trading Breakouts

In this article I will try to explain to you a particular method of forex trading called as trading breakouts. You could in fact call it a key trading strategy. It might work for you. It might not. Nevertheless it is worthwhile knowing about it.
Carrying out your forex trading activity on what is called trading breakouts is a pretty simple method and has been there for a long long time. Based on this method, you do forex trading by trading breakouts to new chart highs or lows. One of the reasons why this is a successful strategy and will continue to be so is because it is based on the fact that you can observe it on any forex chart.

In forex trading, major forex trends start and continue from new chart highs or lows. So what do you do? First take out the relevant forex chart in front of you on the screen of your computer. Look out for those trends that last for weeks, months or years. Then simply get in on the trade, latch on to the trend and make huge profits. In other words, breakout trading means getting on board these trends that have been there for sometime and riding them to make huge profits.

How do you actually trade on forex breakouts?

To learn more on this you must first understand what is meant by “support levels” and “resistance levels”. Support levels are prices where buyers are likely to show strength and give the market a “floor” and a resistance level are prices where sellers are likely to be strong and give the market a “ceiling”.
So if the currency price were to fall to a strong support level, you could expect buyers to step in and drive the price up. If the price falls below a support level it means that there is more selling pressure or less buying pressure than previously thought. This leads to more traders exiting long position and taking short ones.

On the contrary, if the price rises to a strong resistance level, short sellers would enter the market and traders in long positions may cover their positions to take profits. This combined set of events would lead to more selling pressure and drive the currency price lower. So you could say that resistance serves as an entry point for traders looking to buy on a breakout.
When the price breaks through a resistant level, what happens? It triggers a large number of stop orders. This makes a case for greater buying power. The stronger the resistant level, the greater would be the number of stops that are triggered and the larger the move above resistance.

But be careful as not every breakout is genuine. Often some large institutional traders try to drive the price higher in the short term just to trigger these stops, because they know many traders would have placed stops to sell just above resistant levels. So the price could well fall back to resistance. The same dangers of false breakouts apply to support levels as well, because the larger players know that many traders place stops to sell just above resistant levels.

Why some traders don’t trade breakouts?

The fact remains that not many traders are able to trade on breakouts. Why is that so.?
There are several reasons. When a breakout happens and has been there for a while the traders wait for a dip to happen before entering the trade. That may be because they would like to reaffirm in their minds if the breakouts were indeed sustainable. But that wait could well be in vain as good breakouts seldom come back to happen again. So what is the best breakout system you should be looking out for? In reality only a good forex training programme could help you on that.

But nevertheless here are a few more basics on forex breakouts
1) Choose the best break out.
As explained earlier, not every breakout may be the right one to attempt a trade. So first look out for currency levels that have been tested several times preferably twice or more number of times before you enter a trade. Remember, the more times a currency price level has been tested before it breaks, the better the odds of success to attempt a trade.
2) Confirm the breakout
Firstly confirm the breakouts and reconfirm it if you could. This is easily said than done. Using momentum oscillators try to figure out the breakout that has the maximum momentum in accelerating the trend. If one or two momentum oscillators confirm the breakout, then it is time for you to execute a trade. The point is some breakouts may get stalled while others could have the potential to become winners. So confirming the breakout is vital aspect of trading on forex breakouts.
3) Putting stops and having proper money management
As a matter of fact big breakouts can last a long time perhaps for days or months together. So you need to give a bit back at the end when the trend finally turns. Your aim is to make profits by catching a major chunk of the trend and not to exactly buy or sell market highs or lows. Only by doing this you could make good money.

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