Breakout is a common forex trading strategy used by many traders. Learn why breakouts work, what conditions are needed to make them higher probability and how to apply a breakout strategy to the Euro.
Why Trade Breakouts
We are often taught to buy low and sell high. However, in breakout trading, we actually do the opposite of buying high and selling low. How can this type of strategy actually work in the financial markets?
The fear of missing something is a powerful emotion. If you think a strong trend is going to develop, but don’t trade it, watch what happens to your emotions as you see the trend eventually move in the direction you thought it was going to go. That is the fear of missing something. At that point, traders generally feel compelled to enter into the trend because they knew they were right.
Higher probability breakouts need strong trends or volatile conditions behind the market. Strong trends are more likely going to have the force to successfully break through. Think of a strong and muscular person punching a wooden board. They can generate enough force (think strong trend) to push through those support and resistance levels.
Why Trade Breakouts
We are often taught to buy low and sell high. However, in breakout trading, we actually do the opposite of buying high and selling low. How can this type of strategy actually work in the financial markets?
The fear of missing something is a powerful emotion. If you think a strong trend is going to develop, but don’t trade it, watch what happens to your emotions as you see the trend eventually move in the direction you thought it was going to go. That is the fear of missing something. At that point, traders generally feel compelled to enter into the trend because they knew they were right.
Trading breakouts plays off the emotion of missing something. As a strong trend develops, everybody wants to hop on board which adds more fuel to the trend. By waiting for higher prices and strategically entering above resistance forces the market to dictate to you when it is ready to trade at new levels not seen in a while.What Ingredients Are Needed for Follow Thru
Higher probability breakouts need strong trends or volatile conditions behind the market. Strong trends are more likely going to have the force to successfully break through. Think of a strong and muscular person punching a wooden board. They can generate enough force (think strong trend) to push through those support and resistance levels.
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