Breakouts are some of the most lucrative trading strategies that traders could use. While most traders are happy with a reward-risk ratio of 1.5:1, breakout strategies could yield as much as four times the risk on a stop loss. This allows traders to profit so much on any given day.
However, this comes with a cost. Breakout strategies are not that easy to trade. Trading breakouts often mean trading against an existing supply or demand area. Many traders often deem trading against these zones as a bad idea.
For those who are willing to take risks however, this is a very enticing trade setup. Often, after a breakout is breached and price has confirmed to have broken out of a support or resistance line, there is usually little to no resistance on the price chart. This allows price to travel far from the entry zone and produce huge profits for breakout traders.
There are many ways to trade breakouts. Traders take different approaches to identify these supply and demand zones or support and resistance lines. 5 Day Breakout Forex Trading Strategy is just one of the many ways to trade breakouts.
Breakout Indicator
Breakout indicator is a custom indicator that helps traders identify long-term support and resistance lines.
It identifies horizontal support and resistance lines simply by identifying the highest and lowest swing point for the past five days. It then draws a green horizontal line for the resistance and a red horizontal line for the support.
These areas make a good horizontal support and resistance, or supply and demand zones geared for swing trading.
In a way, this Breakout indicator is a breakout box for the previous five days.
Trading Strategy
This trading strategy is usually applied as a swing trading strategy used by some professional traders and is traded on a week by week analysis. This method is a simplified version of such strategy.
To trade this strategy, we will be observing for price to breakout beyond the support or resistance line. We should wait for a bullish breakout on the resistance line or a bearish breakout on the support line.
Then, we observe how price reacts with these areas. In some cases, price would gain momentum instantly and move in the direction of the trade right away. However, this does not happen all the time.
Often, what happens is that price would usually test and retest the support or resistance line. Price would often retrace back towards the line before starting a new trend. If price rejects the support and resistance line and shows signs of continuing the direction of the breakout, that would confirm the breakout. We then take the trade as soon as we observe price action showing signs of continuing the direction of the breakout.
The trade is then kept open as long as the 10-period Exponential Moving Average and 20-period Exponential Moving Average (EMA) lines does not reverse.
Indicators:
- breakout (default setting)
- 10 EMA (Gold)
- 20 EMS (Green)
Preferred Time Frames: 1-hour and 4-hour charts
Currency Pairs: major and minor pairs
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- The 10 EMA line should be above the 20 EMA line.
- Price should break above the resistance line marked by the Breakout indicator.
- Price should retrace towards the resistance line.
- Price should then show signs of price rejection as it retraces towards the resistance line based on the price action.
- Enter a buy order as soon as these conditions are met.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the 10 EMA line crosses below the 20 EMA line.
Sell Trade Setup
Entry
- The 10 EMA line should be below the 20 EMA line.
- Price should break below the support line marked by the Breakout indicator.
- Price should retrace towards the support line.
- Price should then show signs of price rejection as it retraces towards the support line based on the price action.
- Enter a sell order as soon as these conditions are met.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the 10 EMA line crosses above the 20 EMA line.
Conclusion
Many profitable traders trade this method as a weekly trade setup. Often, they would mark the high and low of the previous week as a support and resistance line. Then, they would wait for breakouts of such levels during the first couple of days of the week. If a breakout occurs, then they would trade in the direction of the trade.
Some traders would also filter trades based on the trend. They would do this by identifying if the weekly candle of the previous week is bullish or bearish. Then they would trade in the direction of the previous week’s candle.
These traders also let profits run by closing trades based on a stop loss. They would trail the stop loss in profit every time price creates a swing point on a lower time frame.
This strategy differs in a couple of ways. First, the support or resistance line is based on a moving 5-day high and low. This makes the trading strategy dynamic, allowing traders to trade any day of the week. It also bases its exit on the reversal of a moving average crossover. This removes all the guess work of trailing the stop loss or closing the trade based on price action.
Recommended MT4 Brokers
XM Broker
- Free $50 To Start Trading Instantly! (Withdraw-able Profit)
- Deposit Bonus up to $5,000
- Unlimited Loyalty Program
- Award Winning Forex Broker
- Additional Exclusive Bonuses Throughout The Year
>> Sign Up for XM Broker Account here <<
FBS Broker
- Trade 100 Bonus: Free $100 to kickstart your trading journey!
- 100% Deposit Bonus: Double your deposit up to $10,000 and trade with enhanced capital.
- Leverage up to 1:3000: Maximizing potential profits with one of the highest leverage options available.
- ‘Best Customer Service Broker Asia’ Award: Recognized excellence in customer support and service.
- Seasonal Promotions: Enjoy a variety of exclusive bonuses and promotional offers all year round.
>> Sign Up for FBS Broker Account here <<
Click here below to download: