Trading breakouts can be a little bit risky, but it can be a really good strategy if you have good risk management, as gathered from Forex Broker Reviews. Of course, you have to have a high risk tolerance to do this well. You also have to improve your risk management strategies first before you try this tactic.
Now, if you have failed in trading breakouts, the Brokers Review can tell you how you can still profit from them.
How does a breakout happen?
The foreign exchange market meets a lot of trends that start from a breakout from a long-term trend. These long-term trends can be caused by a variety of reasons.
However, most beneficial breakouts that many other traders, as well as advanced investment bank trading desks, look for is are the monetary policy divergence.
Monetary policy divergence takes place when a central bank has an upbeat outlook on the futures of economies. When they express this optimism, they strengthen their currency. If this happens in conjunction with another central bank’s cutting of interest rates (or another central bank communicating the weakening of their currency), this can weaken the currency. If the currency is put against another stronger currency, a strong trend can occur and may last for some years.
How do you identify a breakout?
You can spot a breakout by checking the support and resistance levels, or the price ceilings and price floors.
When the price breaks, closes, or holds above the resistance level or below the support level, you can be sure that a breakout has already happened.
A breakout indicates a change in the market where one side (either a bull or a bear) has surrendered. The one that goes in favor of the breakout will be leading.
There are three things you should look for when trying to trade on the direction of a breakout.
First, find a price break. You can spot this price break by using a tool, such as the Donchian Channels. Second, find a close above the key level along the direction of the break. Lastly, find a certain time that the price holds.
Remember that if the price spends only a short time above the prior resistance before dropping down into the previous zone, this could mean it’s a false breakout. If you have placed a bet on this direction, the best thing you could to is exit. Wait until the landscape clears out before trying to re-enter.
This teaches you to value the amount of time that the price spends on a level. Some of these signals are short-lived, and therefore not to be much paid attention to.
False breakouts usually happen in the market, and many traders fall for it. Most of the time, allowing yourself to some time before acting up will be the best course of action.
There will always be alternatives and other good ways to use breakouts and trading breakouts to your advantage. As we have mentioned, the key is excellent risk management. This strategy suits advance, experienced traders due to their experience in the field. In other words, you should first accumulate knowledge before jumping in and trying to use this strategy.