Breakout Method - How You Can Use it in Your Trading

By Albert Schmidt

Most new traders ask what is the best trading system to start with. I recommend starting with any system that based on a breakout method. Such systems are usually simple and anyone can easily identify a trading setup. This method suits any trading style. If you are a day trader you can use it and if you have only a limited amount of time each day to analyze your charts you can also use a breakout method.

1. Definition of a breakout method.

To have a breakout on the chart it is necessary to identify a range of price on the chart. Usually when price breaks above the range you go long. If it breaks down the range you go short. It was my experience that the narrower the range the trade is more profitable. There are different periods that give you a narrow range. For example almost all USD based pairs have a narrow range during the Asian session usually. Another way to identify the range is to use some type of indicator.

2. Trading rules for breakout method.

As I mentioned the rules are very simple. Once you identified the range you place buy order at the top of the range and sell order at the bottom of the range. The beauty of the systems based on breakout is that you don't have to be guessing where to put your stop losses. They are put at the opposite side of the range. So if your buy order at the top of the range the stop loss for that order will be at the bottom of the range. You can use this kind of system even if you trade part time. For example you can identify a range of Asian session before London open then set your orders and live it until the next day. If you are trading full time you can introduce more sophisticated ways of defining the breakout. You can take a trade only if a candle closes outside the range or you can enter a trade after a pullback.

3. Example of a Bollinger squeeze breakout system.

Bollinger breakout system is one of my favorite breakout systems. All you need to do is open your 15-minute chart and place Bollinger indicator. Now look for the time when Bollinger bands become horizontal and the distance between them becomes less than 10-15 pips. The longer such squeeze lasts the bigger the breakout you can expect. You want no less than 10 of 15-minute periods of a Bollinger squeeze. The smaller the price range the stronger the breakout the more profit you can get. Actually this was my experience with any breakout systems. So now place your buy stop at the upper band and sell order at the lower band. Place you stop-loss levels at the opposite bands. Usually with EURUSD I target at least 30 pips of profit. You can test and experiment with your own taking profit strategies.

Albert Schmidt is a part-time currency trader. After quite a long time of struggle he learned to make consistent profit trading Forex. Review a breakout trading strategy he successfully uses in his trades.