What is Forex Breakout Strategy? Find out the five steps that you need to follow, in order to activate this basic trading strategy

Do you want to know how to use the Breakout trading strategy? Watch our latest video to find out which are the five steps to have profitable results with Forex Breakout strategy.

Forex Breakout Strategy – five simple steps to follow.

Hi everyone. Today, we are going to cover also one of the more basic strategies for trading Forex. It’s called the Breakout Strategy, and it’s one of the more basic strategies since it’s easy to identify, and it’s very also easy to set your Take-Profit and especially Stop-Loss, which means that it’s very good from the point of risk management. So, we have identified five steps that you need to follow and undertake, in order to activate this strategy. So, the first step will be to identify a trend line, and of course, trend line is a diagonal line that connects at least two swing lows or swing highs, in this case. It’s high since it’s downtrend, so, this line is acting as a resistance. So, here we have first touch, second touch. Here we have a number of touches, we’re going to count as one touch since it’s one after another, they are repeated waves. And then, here we come close for even a fourth touch. But what’s important for this strategy, is we didn’t see any penetration through this trend line. Hence, we are looking to have one in the near future, since we had four touches, more or less, that were rejected and after each and every touch, you can see that the price rebounded lower, and then, after the fourth touch and inability to move above the trend line, then we saw a big push lower, which means the price consolidated for some time and then continued to have another push, other trend line.

Usually, when you have a consolidation down below, and then another sharp like higher is going to take place, like we have it here, for the example, and then we have here a fifth touch of the trend line. So, the first step would be to identify the trend line, the second step would be that we are looking for the penetration of the trend line, which actually happens here, and close comfortably above the trend line. What you don’t want to see is, you don’t want to go really and study the price under a microscope and see whether we close it above the trend line for a pip or two above it. What you want is a close, like we have here, it is 15 pips above the trend line close, and this will be the second step for this strategy.

The third step is that we wait for the retest. Why are we doing this? Because you don’t want to enter the trade as soon as the price closes and the candle is formatted on a one-hour chart because here we have a close that is, as we said, 15 pips above the trend line. But, the question is, what happens if the price pushes 50 pips above the trend line in one hour and closes here almost near the top. You don’t want to enter the trade there, since you may then enter into the trade and then price rebounds lower and then you are suddenly in a trade, what is this, 60 – 70 pips all over. So you’re already in red and this is actually the point where you need to enter into the trade from the risk management point of view. So, here, let me zoom in. So, here, you are entering the trade and you can see a push above and then the retest here, and then you enter the trade. So, in this particular case it’s 1.1787 and then, that will be the fourth step to enter into the trade and the final step would be to identify Stop-Loss, and Take-Profit.

Stop-Loss is easy to identify, because what are you trading here, you are trading a breakout, which means here we are buying the price, because we expect continuation higher because we broke the trend line that kept the price below it, for weeks. So here, what we don’t want to see, we don’t want to see push back below it and then close below it. That’s why I am advising that you put your Stop-Loss at least 15 or 20 pips below the trend line, so you guard against these pushes below 5, 6 pips pushes below, that is more like a choppy price and choppy trading that has a goal of stopping out a lot of investors, out of the game. So, here, you want to put your Stop-Loss, I put it here, so you can see it’s around 20 pips, in order to guard myself, as I said, against this small penetration.

Take-Profit is a bit more tricky to identify, but, more or less, this is a very basic strategy. You simply have to look at the bigger picture and find the horizontal resistance. What are the traders who are entering along and who are long from here, some of them are long from here, or from the breakout here. Where are they looking to exit their trades? You always have to put yourself in their minds. So, if you analyze it, then you’re going to have the first level. This is a big horizontal resistance, that comes at 1855, is it either that level or even higher, at 1880. Here, in this particular case, we went sharply higher and touched this first resistance to the pip. You can see here, this touch and this touch here to the pip. If you, also, of course, want to be more conservative, you can also trade against this resistance point, but then, we are talking about 20 pips Take-Profit. What I advise is that you always look at at least 1.5:1 risk:reward ratio, which means that if, in this case, at least 20 pips, you are looking to gain at least, let’s say, 30, 40 or 50 pips. So, it is very important here that you respect both levels, so, if you set your Stop-Loss that you don’t, you move your Stop-Loss over, because if the price closes here, immediately, after we penetrated, then you are going to see another move lower. Why? Because the price couldn’t sustain above the trend line. And what we saw here, is a classic breakout, so we went above it, we came back to retest and then sharp move higher. In this case, 70 pips higher.

Let me also use another chart to show you, just more or less a very similar picture. So, again, we have a trend line. Here, we have some touches, but then this touch is very important since you can see now that we formed a very nice resistance trend line and as soon as the trend line is formed, you can see that investors are going to try to penetrate above the trend line. Why? Because the longer the trend line is, you have, in this case, you have more sellers. So you have people who are selling the price here because they think the price is going to rebound from here and go back below, and those people are putting their stops here.

This is why it’s important to always be in the trade at the right time, and not wait enough, because usually, breakouts happen very quickly. So here, what we have is we have a couple of pushes below, but actually only here, this candle, where we close, comfortably, we close 10 pips above the trend line or even more, 12 pips above the trend line. Only here you can actually then say, okay, we broke above the trend line and then you’re ready for the retest, which happens here. You see this candle touched first the trend line to the pip. Here, you enter your long trade and then you, again, as advised, you put your Stop-Loss around 20 pips below to protect yourself against these moves, 5 6 7 8 pips moves to the trend line and then you’re looking for a Take-Profit, which again, I repeat, for some people, it’s enough to get 20, 30 pips, but if you’re looking for 20 pips or 25 pips, depending on your risk management strategy, then we advise that you, in that case, that you target at least 40 or 50 pips and in the same model like with the Euro/Dollar, here is very easy to identify take profit, you have this big horizontal resistance level. You see many touches here at 1.2910 and you can see that, as soon as the price breaks this trend line, it goes immediately higher and tests 1.2910. So, we are talking here, in this case, it’s one of the best examples that we could find. We are talking about 100 pips Take-Profit, against 20 pips Stop-Loss, which is a risk:reward ratio to 5:1, of course, and at this point, we did not know that we are going to go all the way up to here, but, as I said for those who are patient, and who believe in big levels, this is for sure a big level, then this is what happened in the end.

So, just to recap, five steps to follow, in order to implement the breakout strategy. The first one will need to identify the trend line, the second one will be that you have a close above or below the trend line, depending if it’s a bullish or bearish trend line. Wait for the retest, extremely important for the risk management’s context, then enter the trade and of course, set your Stop-Loss and Take-Profit, in order to reflect the risk-reward, which is at least a 1.1:1 or, even better, 2:1.