Break out strategy is a trading strategy based on the trader’s ability to spot new trends as they emerge. When utilized correctly by a skilled trader, it can be a highly profitable strategy. However, it is notoriously difficult (even for seasoned FX traders) to distinguish up-and-down fluctuations within a trend from signs that are telling us that a trend is about to break.
Break out traders using technical analysis will typically start by identifying support and resistance lines for a currency price in relation to another currency. This is because breaks are more likely to occur around these lines.
When you believe that a break is about to happen that will send the price up and eventually establish a higher resistance level, it makes sense to go into a long position. Conversely, if you believe that a break is about to happen that will send the price down and eventually establish a lower support level, you might want to consider short positions.
With break out trading, you can profit from any breakout – regardless of if it is a new upward trend or a new downward trend.
This article was last updated on: August 7, 2016