Forex breakout is one of the more commonly used forex trading strategies that are used by currency trader. The main reason it is so widely used is because of the clarity and simplicity of execution. It is so simple that even new traders without much experience can trade profitably with it if they put in some effort to practice the strategy in their demo account.
So what exactly is Forex Breakout?
It is the sudden surge of price in a particular direction after a period of side way movement or consolidation. With the sudden price movement, you will then enter a trade in the direction to grab the profit by riding the trend.
Forex Breakout Sudden Movement
But How to Identify Forex Breakout Opportunity
First of all, you need to know the various candle patterns that will eventually constitute a breakout trading.
1) Triangle
Triangle
2) Flag
Flag Formation
3) Trend Channeling
Trend Channel Formation
These are the common patterns for a forex breakout to occur. Usually It takes some time for the patterns to emerge and you should be on your toes when you saw these patterns on your chart and wait patiently for an entry opportunity.
Secondly, you need the help of an indicator called “Bollinger Bands”. The purpose of this indicator is to provide you with volatility check. It will be able to tell you whether the price is currently in consolidation or not.
When the upper and lower bands are narrow, it is signaling to you that the price is currently in consolidation and you should be waiting for a breakout.
Here are the steps I usually take to trade forex breakout
1) Setup the following indicators – Bollinger Bands (Default Setting), Stochastic (Slow) and MACD (Moving Average Convergence Divergence).
2) Draw the necessary trend lines to identify support and resistance level or even channel wall.
3) Always keep a lookout for the Bollinger Bands when it is narrow as it usually signals a consolidation in progress and then wait for the stochastic to either go oversold or overbought. Once the price produces a sudden surge in movement and also at the same time the bollinger bands starts to widen, you should then wait for the stochastic to either curve up if you are going LONG or curve down if you are going SHORT.
Bollinger Band Volatility Check
4) Always wait patiently for a proper trend line break before you enter any trade. Failure to do so may lead to loss of money due to fake outs.
Example
This is usually how I trade breakout in forex and the winning percentage is pretty high for this strategy.
Note to Readers:
Do note that the above strategy is a general strategy that has not been fine tuned. In order for you to trade with it, please fine it tune on a demo account. If you do not know how to fine tune a strategy, please read the below
How to formulate your forex strategy
For those of you who are totally new to forex trading, I will suggest that you read through this blog post that I have written for beginners
If you are interested to learn how I do my forex technical analysis, you can take a look at the post below
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Hello
I just saw your website and thanks for the wonderful contents that you share. Just a quick question for this post, what are the settings of your Stoch and MACD for this breakout strategy, are they all on default settings?
Thank you.
Enes
Hi
The stochastic and MACD settings are default setting on the post.
Hi
Please could you help and tell me what time frame you use the above video with? I am trying the bollinger band and macd but also would like to know if you trade this what time frame do you use?If I am a day trader would 15 minute time frame be okay to use with the bollinger and macd?
Hi Quenton
All the strategy taught in this blog are applicable to all time frame. So do not worry about the time frame. What you need to emphasize is the trade setup and not time frame.
Dear KH;
Thanks for your good effort and good explanation , i need to set the suitable take profit points for this strategy in the m15 frame
Sir.I’m hoping to read from u,Now the question is price approaching resistance level of bb stochastic reach it high peak and started to curve down and space apart however rsi doesn’t follow stoch alway up to the top and remain at bearish 50mark dividing line or on the bullish/bearish borderline.Sir what’s happen here? Should I ignore or sell? Y/N.explain for your advice is encouraging.keep good work.
Hi ajose
It looks like you have a confluence of BB and Stochastic but not the RSI.
Whether you are going to enter a trade depend on you. There are times where the trade is profitable even if there is confluence of BB and Stochastic. There are also times when the trade ended up as a loser even when 3 of them are aligned.
What you must do depends on your risk level. If you are willing to take more risk, you can always enter when 2 indicators are aligned. You will still be profitable as this will give you more traders. However if you are a very careful person, you can wait for 3 of them to align as it will give you higher probability of winning. In return, you may only have a few traders every month.
Ah KH, I only found your website last night after I blew up my first account hehe – I just gazed at the screen and said ah well, that taught me a big fat lesson – and here I am learning. It wasn’t a big loss but it hurt a little all over one unexpected long bear candle and the fact that I placed a very risky trade without thinking it through. Well I just wanted to say thank you so much – you are a great teacher – I am only starting your lessons but already learning so much. So far I have been using a support and resistance indicator on MT4 called support and resistance barry – you know it? It’s like blue and red dots. What do you think of that indicator? I have to learn how to draw support and resistance lines myself (from Professor Kelvin of couse)
Gill (Ireland)
Hi Gill
I am glad that you like the information in this website and I am flatter from the Professor word you are using on me.
As for the indicator, are you referring to PSAR which has the blue and red dot above or below the candlestick?
Hi,
Thanks for your informative and wonderful site. I did apply Trend Channeling on AUD/USD on 15 minute chart. I would have got around 60 pips but couldnt wait and closed at 40 pips. All three conditions were met MACD/Stoch,(I used RSI also).
I hope it works for me in future also.
Thanks
HA
Hi, pls i have been searching and testing indicators for many weeks now. pls i only need indicators that can tell me very short trend-say 5 to 10 minutes. thanks
Hi
If you are looking for short term trading indicators, you can look at the oscillator like the RSI or stochastic.
Many times, RSi and stocastic fake out.
Hi Abiodun
The main problem with break trades is fake out and therefore you have to be able to minimize the impact on your trade in order to profit. One of the way will be through the use of MACD indicator.
Can you tell me which time frame you use for Breakout Strategy ? thanks a lot
and which is the best time frame ?
Hi Boyxx
The breakout strategy works for all time frames. As for the time frame to use, it all depends on your trading style. If you are a day trader, you can go with the 15 minutes chart and if you are a position trader, you can go with the hourly or daily chart. Do note that the higher the time frame you use, the more movement you will get.