Breakout Trading Strategies
Breakouts take place when price action breaks out from an established support or resistance. Trading these breakouts can be a profitable strategy. But most often price breaks out from a certain support and resistance and then returns to that level again. Other times, prices return to the support and resistance level after the breakout but then again start moving in the direction of the breakout.
This retracement means that you need a bit wider stop loss when trading these breakouts so as to give your trade a little breathing room in case there is an initial retracement. The best method is to place the initial stop loss at the last minor dip or the last minor rally.
Now, when a breakout takes place, you never know if the price will continue in the direction of the breakout or the breakout will fizzle out with the price returning to where they were before the breakout. So you need certain filters that tell you this is a true breakout. One can be waiting for the price to move a certain minimum amount in the direction of the breakout before committing yourself to that breakout trade.
A second entry filter can be the breakout bar or candlestick close. If the close of the breakout bar or candlestick is not beyond the breakout level, it means a false breakout. If the close is indeed beyond the breakout level, wait for the subsequent candlestick or bar to go beyond the extreme of the breakout bar or candlestick before you enter into a trade.
Third entry filter can be the pullback or the throwback after the breakout on the downside or the upside.
These were some entry and stop loss strategies. What is the best exit strategy? Once the breakout is confirmed, replace the initial stop loss with a trailing stop loss. This way, as long as the momentum continues and price keeps on moving in one direction, you will be in the market but as soon as retracement starts, the trailing stop will get you out of the market.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Try these Forex Signals by two top gun traders in a friendly competition. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade.
by: Ahmad Hassam
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Word Count: 354
Date: Fri, 11 Feb 2011
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