To trade the breakout, we need to be first able to identify the market formation on which we expect the breakout to occur. This can be done in multiple ways, both by indicators and by manual drawing of support and resistance zones.
In recent years we have experimented and personally tested multiple approaches to breakout identification. Each one of the ca be implemented with great results, when mastered.
How to identify tunnel for the breakout.
Manual drawing of breakout channel
We can create horizontal trading tunnel (range) by connecting tops with horizontal resistance and bottoms with horizontal support. We can create sloping (trend) tunnel in the similar fashion. By connecting rising or declining lows and highs. The more significant the S/R zone the bigger breakout can be expected. This is the skill that should be mastered by each aspiring forex trader. We can either draw a tunnel and wait for breakout in any direction, or we can draw single S/R line on historically important price and expect the breakout in single direction. Those important areas are a great place to be really attacked by aggressive pyramiding in the direction of breakout.
Using the indicators to generate breakout channel
Bollinger bands
Bollinger bands are able to create reliable, volatility dependent tunnel. Due to the calculation method, BB will be adjusted according to market volatility. We have created multiple systems using BB as tunnel and breakout indicators. In all used scenarios they will identify breakout with higher accuracy when working in the direction of trend. True breakout is often identified accurately by wider variety of BB tunnel with different calculation period and deviation.
Envelopes
Another commonly used forex indicator that is able to draw a tunnel. Unlike the BB it is not volatility dependent. It is able to identify the breakout with same degree of competency as bollinger bands. The accuracy also increases when using it only in the direction of main trend.
Fractals
When using the algorithm., fractals indicator is a great way to visualize and trade the price wave. Fractals can be also used to remove subjective factor from chart formations. Accuracy is increased when used in direction of trend. However fractals can also identify some reversal patterns such as double top or ABC at the end of the correction. Therefore breakout can be traded on better price in the direction of trend (compared to standard tunnel).
Zig zag indicator
Zig zag is lagging indicator with little to none use for immediate entry. It can be used in to visualize previous price movements. Zig zag indicator makes it easier to find those important tops and bottoms. They can be then connected to draw S/R zones of various trading formations useful for breakout trading.
Doji candle
Doji candle occurring on higher timeframe signalizes possible range in lower timeframes. This easy to find candle formation can be then used to trade breakouts. Professional traders will often use more aggressive methods either to repeat failed entry, or to add to the winning trade (Do this with NEWS and breakouts MT4 EA). Looking for doji stars is good approach for traders that do not want to look and draw ranges on lower timeframes, but still wanting to trade breakouts.Multiple strategies we have created and tested confirmed, that doji signal can be employed with great results (Doji mt4 expert advisor).
Conclusion: there are various methods to look for the same thing. Significant price level, that will trigger breakout once penetrated. Good breakout will move rapidly away from the S/R price launching the snowball effect. Breakout often stand at the beginning of new trend and some of the best trading opportunities present in the market. To take full advantage of them check our Breakout MT4 Expert advisors.
