Trading breakouts is one of the best ways to approach markets. Forex breakouts are reliable and can be found on any currency pair and any timeframe. Even when you do not use breakouts as entry points, being aware that they are present on the market, helps to avoid difficult situations and increase profits of any trading system.
Finding horizontal tunnel.
Price moves in a horizontal belt. Width of the belt can vary greatly. Experienced forex trader will modify his approach, based on tunnel properties. Wave structure of the market will not create lower lows and higher highs. Price will react at least 2 times at same level, only to return to opposite side of the tunnel. We draw a tunnel by connecting at least two horizontal highs and two horizontal lows. Thus creating support on the bottom and resistance on the top of the tunnel.
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Price will penetrate one of the lines. Breakout is confirmed when price closes above trend line. This alone however, is not sufficient signal. We need to consider another factors to be able to effectively trade this type of breakout.
What are we looking for, to confirm breakout and enter the position ?
How price approached the trend line (support/resistance) that got broken ?
Valid breakout : Bodies of candles in direction of breakout are getting wider. Growing confidence in breakout.
Invalid breakout: Flat bodies of candles (no real intention of breakout), lack of confidence.
Shape of the candle after breakout.
Valid: Full bodied candle that closed far after trend line breakout. Low wick in the direction of breakout. High wick inside the tunnel (opposing the breakout) also confirms new price direction.
Invalid. Wick of the breakout candle is too high, often wider than the body of a candle. This applies to the wick in the direction of breakout.
After a breakout occurs, we need to validate position entry. This process needs to be done quickly because most of the times price will immediately move in the direction of breakout, not giving you too much time to decide and react. Therefore, you need to practice. In breakout trading, experience is the most valuable asset forex trader can have.
Exit:Width of the tunnel is our goal for take profit. However, we also consider the distance of our entry from support/resistance line that got broken.
We place our protective stop loss at the opposite side of the tunnel.
TIP: Consider Volumes forex indicator in breakouts.