Step 2 – Breakout strategies

Breakout strategy

The Beginners Forex strategy is an advanced version of what is known as a breakout strategy.  In this article I will show you some commonly used breakout strategies, that will help you understand the Beginners Forex strategy.

A breakout is when the market (supply or demand) moves through an area of supply or demand in the market.  There are many different strategies that people use to trade break- outs.  In this article I will be showing you examples of two of the most popular breakout strategies.  The first type of breakout strategy is the most simple and is displayed in the images below.

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The breakout strategy takes advantage of areas in the market where supply and demand is considered as weak or strong.  Supply or demand may be analysed as being weak or strong for many reasons.  Here are just a few.

  1.  The number of pips moved and the areas that have been passed. ( See article on supply and demand).
  2. The percentage the market has already retraced.
  3. A news event that caused a lot of buying or selling in the market. (News event can be considered significant or insignificant)

You don’t need to worry about what makes an area strong or weak for now.  These bullet points will just help to give you a little bit of context about why we trade with the breakout strategy.

In the example on the left the area of demand is considered weak by the trader.  Once the market passes through the area of demand that is determined weak the trader takes a sell.  Simple enough.

In the next example on the right we have an area of supply that the trader considers weak.

You can apply the same logical reasoning but this time it’s the opposite way around.  As we now have an area of supply that is weak we are interested in buying the market when we break through this area.

This is perhaps the most popular breakout strategy and easiest to understand.  Many breakout strategies build on this simple idea creating a more complex strategy.

An example of a strategy that builds on the simple breakout strategy I have outlined above is known as the false breakout strategy.  This is also known as the fakey breakout strategy in the Forex community.

This strategy is thought of as advanced by many traders but is in fact very simple.  The strategy attempts to use reverse psychology to take advantage of people who are perceived as amateur traders.    In the images below are two examples of how the false breakout strategy works.

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In the example on the left we can see an area of supply pass through the marked area of demand before quickly reversing.  Once the market has reversed we have what is known as a false breakout (fakey).  The area of supply that has reversed is what in Forex is called a wick.

The market appears to be breaking out through an area enticing a large number of simple break out strategy traders into sells.  Traders who sold the market here will have got in at just the wrong point as the market quickly reverses, after temporarily breaking through the area of demand.

In the example on the right we can see an area of demand, pass through an area of supply before quickly reversing.  Again this quick reversal where the market breaks through an area and moves back inside is known as a false breakout (fakey).  The area of demand that has reversed sharply is what in Forex we call a tail.

This time the market seemed to be breaking through an area of supply before the market reversed tricking a lot of traders into buying at just the wrong time.

Remember a sharp reversal of supply or demand can be referred to as either a tail or a wick.  If you move down onto a smaller time frame these wicks and tails can be seen as candlesticks of supply and demand.  Understanding how to trade more than one time frame will be discussed in a later blog post.

The Beginners Forex Strategy is a type of breakout strategy, so it is important that you have a basic knowledge of what a breakout strategy is.  Once you understand the basic concepts of a breakout strategy you will be much better equipped in your journey towards success in Forex.

 

 

 

 

 

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