Many traders spend a lot of time looking for potential breakout situations when trading the forex markets. This is because when these breakouts occur, they very often yield a lot of points. So bearing that in mind, in this article I will discuss three simple trading strategies designed to catch these breakouts.
The first method makes use of Bollinger Bands. This technical indicator is very useful in displaying areas of support and resistance, which is marked by the two outer lines of the Bollinger Band range. Therefore when one of these outer limits is breached, you very often get a breakout in the same direction.
So to trade this breakout you ideally want to wait for a period where the outer lines of the Bollinger Bands indicator have narrowed because this indicates a period of tight consolidation. This means that a breakout will usually have momentum when it does break out of this tight range. Then when the price does break through one of the outer lines you can either jump in straight away or wait for a pullback to a short-term Exponential Moving Average, for example, for a better entry point.
The second method you can use involves using multiple Exponential Moving Averages, and in particular the 5, 20 and 50 period EMA's. You may also like to add the 100 or 200 period EMA to your chart as well.
Then you simply wait until all of these indicators have flattened out and are trading very close to each other, along with the price. Then you wait for the shorter term EMA, ie the EMA (5) to break out strongly from this narrow range, before taking a position in the same direction as the breakout, and close to the EMA (5) for maximum value.
Finally you can use a price-based system to trade breakouts. There are various ways you can do this. The simplest systems involve waiting until the price has started trading in a very narrow range, and then taking a position when the price breaks out of this range.
Another common system involves noting the high and low point from the previous day and then waiting for the price to break out of this range the following day. Indeed this can be a very effective way of trading the major currency pairs.
So overall there are a few ways in which you can trade forex breakouts. Of course like all trading methods none of these methods work 100% of the time, and you will need to adopt a good stop loss strategy, but if you can catch a breakout you can very often grab lots of points profit because the price often moves strongly out of a tight range, as more and more traders jump on board.
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