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Forex Trading - If You're Struggling Why Not Try Breakout Trading?

Sep 15, 2008
Many traders drive themselves crazy trying to come up with a trading system that will consistently make them money. Most of these people will usually end up losing their trading capital and give up forex trading altogether but you can potentially avoid this scenario by simplifying your trading and simply looking for breakouts.

Breakout trading is a very popular forex trading method that can yield substantial profits. This is particularly true over the longer time frames where the breakouts can be stronger and more pronounced. The reason breakout trading is so profitable is because when the price of a currency remains locked in a tight trading range for any length of time, once it breaks out, either upwards or downwards, the resulting move often has a lot of momentum behind it and therefore moves substantially in that direction.

So how can you spot and trade these breakouts? Well just by looking at a basic price chart you will see periods of consolidation but if you plot 5, 20 and 50 period EMA's, for example, you will see occasions when the price is trading close to all three of these EMA's. This indicates a tight period of consolidation and will often result in a strong breakout when the price moves away from these indicators. So you will want to enter a position ideally close to the EMA (5) when the breakout occurs.

Similarly you can also draw lines showing support and resistance levels or high and low points and take a position when these levels are breached. You can also use the Bollinger Band indicator to trade breakouts. This can also be highly effective because when the bands narrow you know that a breakout is imminent and can enter a position in the same direction once either the upper or lower band is breached.

So there are several ways you can trade breakouts, each of which has their merits. I personally favour the EMA's method because it can yield some huge gains, particularly when used over a longer time frame. Just take a look at the EUR/USD monthly chart, for example. You will see by plotting the 5, 20 and 50 period EMA's that in 2005 and 2006 the price consolidated around these indicators before breaking upwards in April 2006 where it then gained another 3500 points in the next couple of years.

So the point is that forex trading does not necessarily have to be complicated. Some of the most simplest of systems are often the most profitable, and there's no doubt that trading breakouts is one of the more straight-forward forex trading methods out there, yet it's also one of the most profitable.
About the Author
Click here to visit James Woolley's forex trading blog and to discover the best forex trading systems.
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