Forex Trading: Breakout Systems

Forex Trading: Breakout Systems

by Harold Hsu

While there are many different varieties of Forex trading systems, one of the most reliable types are those that involve breakouts.

What is a breakout?

Breakouts are basically price movements that shoot out of a price consolidation range. Breakouts can occur either above resistance or below support levels.

What is the significance of a range breakout?

A breakout from a recent price consolidation typically indicates that prices are likely to keep moving in the direction of the breakout. If the breakout occurs above resistance levels, prices are likely to keep going up. If the breakout occurs below support levels, prices are likely to keep going down.

Why are breakouts good predictors of future price movement?

When the market price moves below support levels for example, it means that the buyers that were supporting the price have “run out of steam”, resulting in the sellers pushing price down. And because the buyers have no more “strength”, the remaining sellers are expected to further push the market price even lower.

The opposite is true for prices that breakout above resistance levels.

Are breakouts 100% accurate in predicting future price movements?

Unfortunately, the answer is no. There is actually no single method that can predict future price movements with a 100% certainty. Price breakouts are only one of the many indicators you should include in your trading system and strategies.

I have entered into many trades where price breakouts reversed almost immediately after I placed my trade, so please be aware that prices may not always keep moving in the direction of the breakout.

Breakouts only increase the probability that the market price will move in the expected direction; it does not guarantee it.