Trading Price Action Breakouts

09/09/2013 9:00 am EST

Focus: FOREX

Price action breakouts can be a great way to take advantage of a market reversal, writes Walker England of DailyFX.com, and once found, traders can employ a breakout strategy for entries.

Price action breakout traders have the benefit of trading with the trend, as well as potentially being the first to spot market reversals. Below we can see a prime example of such a breakout in action. Currently the EUR/AUD has advanced as much as 1219 pips since its June 14 low to its current swing high at 1.5029. However, looking at the chart below, it is important to notice that price action has moved below series of previous lows printed during the pair’s ascent. With the EUR/AUD breaking out towards lower lows for the first time in months, this makes the currency pair a prime candidate for breakout trading.

Today we will look at identifying a potential breakout and the opportunities that follow.

EUR/AUD 4-Hour Uptrend

chart
(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

Trading Breakouts
After finding the previous swing low or high in an uptrend, trading a price action breakout becomes a very straightforward process. Going back to our example on the EUR/AUD, the previous low for the pair’s uptrend resided at 1.4442. This point was acting as an area of price support for the pair as it was moving up towards higher highs. This support was acting like a floor for price and price action breakout traders looking for a reversal have waited patiently for price to trade below this point. With the new creation of a lower low, traders will look to sell this breakout with the expectation of price to develop a fresh downtrend.

Entry orders are always an effective and easy way to prepare for a market breakout. An entry order is a pending order. In the event that the market trades through a level or support or resistance, your order will be executed and your trade triggered into the market. Regardless if you are in front of your charts or not, by using an entry order your trade is scheduled to execute as soon as s breakout occurs!

EUR/AUD Breakout

chart
(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

Stops and Limits
After finding a breakout point to place an entry order, traders should then consider to manage their risk. Normally when trading a breakout in a new downtrend, traders will look to place stops above the broken line of previous support. Stop values can be placed 1ATR value above this level to account for current market volatility.

Once a stop is set using ATR, traders can then multiply that value to find a positive risk: reward ratio of their liking.

By Walker England, Trading Instructor, DailyFX.com

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