Using the Breakout Trading strategy to Trade – for Beginners

You’ve probably heard of the term trading strategy, perhaps you have even used one! Having a trading strategy is very important and when used correctly can help you improve your results.

Each day, there is 5.3 trillion dollars in turnover in the forex market, making it the world’s largest and most liquid market. [1]

Many platforms, such as easyMarkets, offer access to the commodity, CFD and equity markets, giving traders the opportunity to diversify their portfolio and take control of their financial future.

If you’re new to the financial markets, you may be at a loss to pick from the sheer volume of trading techniques out there, you can start by learning one at a time. Today we will explain the breakout trading strategy which is a simple trading strategy for beginners.

By mastering this strategy, you can take the next step and learn more complex strategies.

How to Trade the Breakout – Trading Strategy

Forex pairs often fluctuate between bands of support and resistance. This is called a consolidation. A breakout occurs when a pair moves beyond these two boundaries in either direction, leading to new highs or new lows.

But in order for the new trend to begin, a breakout must come first. That’s why it’s helpful to think of a breakout as a potential signal that a new trend has emerged.

However, not all breakouts lead to new trends! Sometimes, the market appears to be breaking out of consolidation but later returns to its previously established trading range. In this case, a new trend has not emerged.

That’s why risk management is so critical in forex trading. Conservative lot sizes, stop-losses and take-profit orders are just some of the tools you can use to minimize your loss, in the event that you were wrong about a new trend formation.

So, how do you determine if a new high or new low is the beginning of a new trend? The first step is to look at whether the pair has overcome a specific support or resistance level. This can be determined by looking at Fibonacci levels, pivot points or even moving averages. When trading the breakout, your buy signal is when price climbs above a zone of resistance and the sell signal occurs when the price falls below a key support.

This can be further confirmed by looking at volatility. Usually, it takes a bigger fluctuation for an asset to move outside of its consolidation range toward new highs or new lows. If volatility is rising, you want to get in on the breakout right away and ride it out until the volatility dies down.[2]

Of course, new highs and new lows are not absolute, but relative. It all depends on how far back you are going in your analysis. A breakout beyond the highest high or lowest low for a longer time frame usually indicates a longer trend. If a breakout occurs over a shorter time frame, then it usually signifies a shorter trend.[3]

The breakout is a simple but effective strategy that has helped traders get their feet wet in the market. It’ll certainly put you on the path of effectively trading the markets, and may open the door to more complex strategies down the road. Always have Trading Strategy

[1] Ron Finberg (February 10, 2013). “How Big is the Retail Forex Market?” Finance Magnates.
[2] BabyPips. How to Trade Breakouts.
[3] Admiral Markets. Simple Forex Trading Strategies for beginners.

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