Forex Strategies: The Breakout Trade

02/13/2012 10:15 am EST

Focus: FOREX

Daniel Hwang

Senior Currency Strategist, Gallant Capital Markets

Dan Hwang reviews how to identify and confirm breakout trade set-ups, shares important ideas about execution, and tells why multiple time frame charts are beneficial to this strategy.

Obviously you have a lot of different choices when it comes to strategies and forex trading; one of those is breakout trading. Our guest today is Dan Hwang to talk about how he does breakout trading.

So Dan, talk about your typical breakout trade.

Well what we look for are typically our shorter-term time frames. We look for price patterns to form after we see a top formation, such as a head-and-shoulders top or a double top.

See related: How to Trade a Head-and-Shoulders Pattern

Once that’s created, we look for short-term trend line breaks or trend channel breaks to the downside.

Typically, we also do like to see divergences that confirm the directional breakout.

Alright, what kind of divergences; what are you looking at?

Divergence between price and momentum, so let’s say we’re seeing price action move to the top side and the MACD indicator start moving lower. What that indicates, typically, is that price should, on a technical basis, follow momentum to the downside.

Dan, when you talk about your favorite time frame for the short term, what is it?

It’s typically 15-minute charts, but what we’re seeing during the current trading conditions, we’re seeing more significant price patterns show up on hourly charts. So at this time, we are focusing on hourly charts for shorter-term breakouts.

Do you watch the daily levels to determine if a breakout happens at a certain level and maybe if there’s some confluence on a shorter-term time frame?

Of course. I think that’s one of the key factors when trading breakouts.

We are looking for Fibonacci levels to converge with key moving averages on daily charts and for that to converge with key consolidation patterns on hourly or 15-minute charts.

Alright, and on these typical breakout trades, how long are they lasting; how long are you in?

Well, it really depends. These days the markets tend to consolidate quite a bit. We saw the euro consolidate between that 1.3450 level to 1.3550, 1.36. So it really depends.

I think these days we’re seeing the consolidation periods actually tend to work out a little bit longer. So when we’re looking at hourly charts, about a day or two.

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