BEGINNER’S GUIDE: Trading A Breakout

The Breakout Trade

Sometimes a currency pair gets stuck in a range between an established high price and established low price. Range trading can be difficult because trading opportunities within the range are limited. When a currency price has enough momentum to break out above or below the established high or low price, this can generate an excellent opportunity to trade.

Support and Resistance

Everyday the Forex market changes and makes new highs, lows called support and resistance levels. Support is a price level below which a currency pair has difficulty falling below. Resistance is a price level which a pair has difficulty rising above.

Think of the area between support and resistance as being a room. Support is the floor and resistance is the ceiling. The pair will move between those two levels until a “breakout” occurs in one direction or the other.

Do Not Trade Exactly At Support or Resistance

Remember that a currency’s high and low levels are sometimes very difficult to break. A currency price may “test” the floor or ceiling prices without actually breaking through. It is wise to set your Entry Point at least 5-10 pips outside of the actual support and resistance levels.

Breakout Trade Example

On May 2nd, the ForexSignal team sent out this signal:

USD/CHF SELL Order = 0.9561 Stop = 0.9621 Target #1 = 0.9531 Target #2 = 0.9501

Previously, a support level had been created at 0.9568 and we set our Entry Point to sell 7 below the floor at 0.9561. Sure enough, once the trade broke this very strong, pivotal level our trade continued short until both of our Targets were reached.

A Note of Caution

There are many other factors to consider when deciding to trade a breakout of a previous high or low. For example, is the currency pair trending long or short? If it is trending short, it would not be wise to expect that there would be a huge and long-standing breakout in the long direction. This may mean that instead of aiming for a breakout of 120 pips, that you just aim for 30-60 pips. Or perhaps there is a major economic event such as NFP, then regardless of how strong a breakout may seem, it would be wise to be careful because during major news events, there is increased volatility.

At ForexSignal.com we love to trade breakouts, but we are very careful of the overall long-term trend and fundamental factors. Our goal is to provide the very best Forex signal opportunities to our Forex Signal subscribers all over the world.