There are many different ways to approach the market. One method that may surprise some is to trade a breakout in a strong directional markets. Below we can find a great example using the EURUSD daily chart. It has been trending lower for the last two months, and has declined as much as 867 pips since February. As the pair threatens to move lower, traders can then prepare to implement a breakout strategy.
Trading the Breakout
Now that a strong downtrend has been identified on the EURUSD, traders can now plan on trading a breakout towards lower lows. To begin we first need to identify the current low at 1.2845. This point is currently acting as a price floor or level of support which is holding up the pair. Breakout traders plan to enter the market only after price has been driven below this value. Traders will then look to sell with the expectations of the price of the EURUSD moving down to create lower lows.
One of the easiest methods of trading breakouts is with entry orders. An entry order is a great way to trade breakouts because you can set a preset price where you wish to enter into the market. If the price you select becomes available for trading your order will then be executed. This can be a huge benefit to traders that can’t monitor the market 24Hrs a day. Even if you’re away from the trading screen, if the price you select becomes available, your trade will be executed.
Learn Forex – EURUSD Daily Breakout
(Created using FXCM’s Marketscope 2.0 charts)
Setting Stops & Limits
As with any trading plan, breakout traders need to limit risk through the creation of a stop order. There are many ways to place stops but one of the easiest is to simply set your stop order over the previous lower high identified on the chart. In a downtrend traders will wish to exit sell trades on the creation of a new higher high. This would invalidate our interpretation of the trend, and traders would be best suited looking for new opportunities.
Limit orders can always be set by using a positive risk reward ratio. Due to the duration of the trend, traders may look for a 1:2 Risk/Reward setting or better for their trade. This can be found by extrapolating the numbers of pips risked after setting your stop.