Trading Forex with Breakout Level Strategies

Trading Forex with Breakout Level Strategies

• Breakouts
In the Forex market, trading breakouts from significant levels can be one of the best ways to trade, because these breakouts are often very powerful moves that give traders a good chance to make some serious money. The idea of trading breakout Forex strategies is nothing new; traders have been profiting from breakouts from years, because breakouts are an inherent part of the way a market moves. As price accumulates underneath a particular level, it builds up pressure somewhat like a spring, the more times a level contains re-tests of price, the greater the accumulation becomes, as well as the potential for a strong breakout.
In the image below we can see price accumulating in a horizontal manner as the resistance level acts as containment. Once the accumulating price builds up enough “tension” it breaks out form the containment level like a spring releasing its tension, resulting in a powerful move.

• Re-tests of levels
After a breakout occurs in the Forex market, a re-test of the breakout level is a highly likely scenario. A re-test is not guaranteed to occur after a breakout, but many times it will, and if a re-test does occur it is typically a high-probability event that gives traders a ‘second-chance’ to enter a market in the direction of the dominant momentum.
Generally speaking, you want to see some sort of “confirming” trigger event occur as a market re-tests a breakout level. This trigger could be a pin bar trading strategy, or some other price-reversal event; you can make such a re-test strategy part of your overall trading plan and another tool in your trading toolbox.
In the image below we can see two different occasions where price accumulation below a containment area of resistance, then breakout higher, and then ultimately re-tested the breakout level almost exactly before pushing back higher with the dominant market momentum.

• False breaks of levels
One thing to be aware of when trading Forex with breakout level strategies, is that sometimes there will be false-breaks of levels. False breaks occur when a market temporarily breakouts but does not sustain itself above the breakout level and quickly rejects the breakout moving back in the opposite direction. False-breaks can occur as a result of stop-losses getting cleared out by bigger players, or simply by bigger players pushing the market in the opposite direction to create a forced-liquidation of the smaller players.
We can see in the image below that there was a pin bar false-break from the top of the trading range around 1.3430, and then price stayed contained under this resistance before another false-break occurred at the bottom of the trading range around 1.2900. Both of these are examples of the market “faking” the amateurs out by looking like a valid breakout, but then the pros came in and flushed out all the amateurs as they pushed the market in the opposite direction. The two false breaks pictured below are sometimes referred to as bull and bear market traps, respectively.

• Final note on breakouts
It is often best to wait for a clear breakout and then trade the re-test of the breakout level as discussed above, this is a more conservative strategy but it will also help you avoid getting caught in most false-breaks.
There are ways to trade false-breakouts that occur in trending markets or at confluent levels; one strategy is called the “fakey setup”, as coined by Nial Fuller. To learn more about his Forex trading strategies, click here.