The breakout strategy
April 24, 2014 – Written by admin1
The breakout strategy is the one dealing especially with currencies. Basically, it promotes quite small earnings, but on a regular basis, so even though you make little profit, you can do it every day. Adding up, you may be more profitable than you think.
In what may concern the difficulty of practicing it, you should know that it is a simple strategy, controlled mostly by the price movements, which act as a sort of a guide for it. The price fluctuations practically keep evidence of this strategy and determine the outcomes of trades done by applying it.
Since we’ve touched this point of price fluctuations in our discussions, we would like to give you more insights on it. Therefore, these trends in prices can be determined by having a look at the prices of yesterday, in more ways. There are four main statements that can help you decide which pattern the prices followed the day before and by that, getting more information on how they will behave tomorrow. Let’s see what those are.
By analyzing these four possible trends that the price may follow, we discover that the first two options seem to be the most suitable ones, since they offer promising and profitable trading outcomes.
So, if, for example, the first trend happens, you have to start invest in ‘put’ positions, choosing expiration times between one hour and one day. If the second scenario is the trend, the ‘call’ position is the recommended one, with expiry time also from one hour and one day.
The third trend gives no opportunities for successfully trading, so you better not invest at all, whilst the last option is a risky one, so you have higher chances of losing the trade.
How to trade the breakout strategy – rules
First, you have to identify the price range and then discover a ‘break’ of this price from the range. As previously mentioned, the range can be identified by defining the recent trends of the price. Additionally, you may make use of the channel tool when the price has a constant movement, either increasing or decreasing.
There are a few steps you need to follow when applying this strategy. After identifying the price range, you have to also discover the breakout, so that you can trade either a call or a put option, based on the breakout point.
Give the asset time for breaking through the constant trend line. This usually happens when the price moves either above a resistance point or below the support one and has closed above it, for the former, or below it, for the latter.
Generally, the price will tend to come back to its original point, but this will not be possible, due to the reversal role of the broken trend lines. So, you have to wait until the price is rejected by the trend line and then trade.
Make sure you have sufficient funds in your account, so that in case the first trade is unsuccessful, you still have additional capital. Usually, you should not expose to the market more than 5% of your account size.
Before you actually apply this strategy, it is recommended that you practice it, to get a closer feel of what it involves. If your broker offers the possibility of trading with the help of a demo account, you should really consider this option for experiencing trading strategies without taking any risk, so that you learn. And when you’re ready, only win.
Advantages of the breakout strategy
One of the benefits of this strategies is that it has a lot of ‘sub-strategies’ that can be applied, so you have plenty of options to choose from. Most of these options make use of trading tools such as the Bollinger Band, the Fractals or the Elder Rays, so higher chances for winning are provided.
Furthermore, this type of strategy is suitable both for beginners and for more advanced traders. The breakout strategies are fairly easy to put in practice and do not require very advances knowledge or analysis. Once you figure it out, there is nothing standing in your way of achieving the profits you desire.
Use this strategy
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