There are dozens of breakout strategies available to traders, but the Forex breakout strategy you’re about to learn is my personal favorite. This strategy has been responsible for some of my largest gains over the years.
In this lesson, you will learn how to identify the setup, when to enter the market as well as how to identify possible targets. We will also take a look at several examples on both the 4-hour chart as well as the daily chart. I have found these two time frames to work best when trading this breakout strategy.
What is a Breakout?
Before we get into my favorite Forex breakout strategy, let’s first define the term, “breakout”.
A breakout is any price movement outside a defined support or resistance area. The breakout can occur at a horizontal level or a diagonal level, depending on the price action pattern.
Let’s take a look at two illustrations of one of the more common breakout patterns that occur in the Forex market. The first illustration shows a bullish breakout pattern.
Notice in the illustration above, we have a market that is trending up but has found resistance at a horizontal level. After two unsuccessful attempts, the market finally breaks through resistance. This signals a bullish breakout from a key resistance level.
The next illustration we’re going to look at involves a bearish breakout.
Just as you would expect, the bearish breakout is similar to a bullish breakout, only this time the market breaks to the downside. After two unsuccessful attempts, the market finally breaks through support. This signals a bearish breakout from a key support level.
Just as you would expect, the bearish breakout is similar to a bullish breakout, only this time the market breaks to the downside. After two unsuccessful attempts, the market finally breaks through support. This signals a bearish breakout from a key support level.
The Only Forex Breakout Strategy You Will Ever Need
This particular Forex breakout strategy is one I have used for years. It has become my favorite pattern to trade, partly because of its reliability and partly because of the more than favorable risk to reward ratios it often produces.
There are four parts to this Forex breakout pattern.
- Support
- Resistance
- Breakout
- Retest
The illustration above is very similar to the first two illustrations. The major difference here is that instead of having one trend line and one horizontal line, we have two trend lines. One trend line is acting as support while the other is acting as resistance. This forms what’s known as a “wedge”.
The breakout to this pattern occurs when the market eventually breaks to one side or the other. While a wedge is typically a continuation pattern, I tend to trade it based on whichever way the market breaks. In other words, I let the market show its hand before making any considerations about future price movement.
Now let’s apply this same pattern to a USDJPY 4-hour chart.
Notice how in the chart above, the market had worked its way into a wedge pattern. As the market began to consolidate tighter, it eventually broke wedge support and subsequently retested this support level as new resistance.
This retest presented traders with a perfect opportunity to enter short.
More later