Forex breakout trading system
Few trading strategies are as divisive as the trading range breakout—an approach that probably has as many detractors as followers. The first result provides a basic guide, while the second emphasizes reasons traders should not even try to use them.
Yet, breakout trading is one of the first trading strategies many are introduced to in the field of technical analysis. A trader focusing on breakouts looks for a narrow trading channel or trading range in a security or futures where volatility has diminished.
The goal is to establish a position as price breaks out of this trading channel concurrent with a spike in open interest, thereby taking advantage of the increase in volatility and catching a strong trend move. The concept is sound at its core, given an ideal context, but detractors do have some valid points. These include the risk of false breakouts; many price channel breaks will correct back to the breakout point, or beyond.
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These are more common than the ideal explosive moves, which are rare. Most traders who start out with breakouts quickly become aware of the cons of this strategy. The truth is, the way many of us are taught to trade breakouts is wrong. Trading a breakout involves more than simply recognizing a channeling market and placing a trade when the upper channel is supposedly broken, with a protective stop under the lower end of the channel or vice versa for a short position.
It shows a minute channel breakdown taking place in E-mini Dow futures. The channel breaks lower on strong momentum only to turn around rapidly over the next 15 minutes to break through the upper end of the trading channel—where traditional stops would be placed.
Futures went on to have a strong break lower throughout most of the morning. Using traditional breakout strategies, the earlier flush would have taken many traders out of a short position established at the initial break lower. Not only did a profitable move take place without the would-be short trader, but an initial, ultimately correct, position was stopped out at a significant loss.
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Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges.
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A better measure of risk. The age old question Sortino ratio: Previous Cyborg Trader Pro. Next Creating custom indicators. Related Terms technical analysis Google Education Breakouts 10 Trading technique 8.