Breakout is considered by many, to be one of the most reliable signal that can be found in forex. Regardless of timeframes or currency pair, breakout is highly accurate trading signal that can bring you profit.
There are many breakouts forex strategies. This one uses little trick to improve its accuracy making it one of the most successful signals trading ever.
The little trick consists of two parts.
Properly drawing support and resistance, not as lines but as zones. We do so be switching temporarily from candle chart to line chart.
Trick two: We use tighter take profit. In recent years. Forex is getting more and more volatile. Often times we see the best patterns fail, just because they miss target profit by couple of pips and they do not have any plan B.
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This breakout forex strategy is simple and extremely effective, not thanks to those two trick, but because its fundamental inner workings that are present on all markets (not just forex).
Forex strategy rules
As with all pattern recognition in forex, some experience is required to be able to find those patterns and b e confident enough to trade them. In contrary to popular belief, it is not that hard at all. Just switch to lower timeframes and find as many of them as you can in historical data.
We start in line chart.
We find two highs in same price level. We connect them to create resistance zone.
We find two lows in same price level. We connect them to create support zone.
We switch to candle chart.
We draw resistance zone on candle highs. Resistance zone should cover the distance between candle high and highest bullish candle close.
We draw support zone on candle lows. Support zone should cover the distance between candle low and lowest bearish candle close.
The consolidation zone trapped between our two properly drawn zones is called tunnel and its breakout will be our entry signal.
Breakout. Candle closing outside the tunnel surpassing either support or resistance zone.
Stop loss is placed at high of a candle for bearish breakout and at the low of a candle for bullish breakout.
Take profit: We will let standard 1:1 risk reward ratio commonly used in this type of breakout go. Our take profit will be marked by first candle of profit closed after our entry.
We go for single candle of profit in this forex strategy. More reasonable profit target ensures extremely high winning rate that more than covers occasional losing trades. Frequent winner are very good for traders morale. Stop loss is still tight enough to be manageable.