Breakout trading is one of the simplest forex trading styles, making it a good choice for beginners. Before we look at how it works, let’s define the term “breakout”.
Put simply, a “breakout” is any price movement outside a defined support or resistance area. Breakouts can occur when prices increase above resistance areas, known as “bullish” breakout patterns. They can also happen when prices decrease below support areas, known as “bearish” breakout patterns.
The reason breakout trading is an important strategy is because breakouts often represent the start of increased market volatility. By waiting for a break in a price level, we can use volatility to our advantage by joining a new trend as it begins.
With breakout trades, the goal is to enter the market when the price makes a breakout move and then continue to ride the trade until volatility dies down.
But when, exactly, should you enter the market?
Some forex pros advise diving in the moment a support or resistance level is breached. Others suggest waiting just long enough to ensure that the breakout does in fact signal a true up or down trend.
When placing your stop loss, place it just above or below the breakout candle, at a minimum. This will help tie your bets to previous support or resistance levels.