Trading Price Breakouts
If you are new to forex trading, one of the easiest ways to get started is to simply concentrate on trading price breakouts.
The key here is to find currency pairs that are trading sideways in a narrow trading range on the daily chart, draw trendlines connecting the highs and the lows, and wait for the price to close outside of this range with strong momentum.
In an ideal scenario, you also want to see a series of short, mid and long-term exponential moving averages (I use the 20, 50, 100 and 200-period EMAs) all trading close together because this indicates a period of consolidation and indecisiveness, and is a common pattern that you will often see before a strong breakout.
USD/JPY Breakout
If you visit this site regularly, you will know that I will often highlight some of the most promising set-ups, and a few weeks ago I highlighted the potential for the USD/JPY to break out of its current trading range.
This was because it continued to trade within an ever decreasing sideways trading range with little volatility or momentum, and all the EMAs were tightly squeezed together in readiness for a potential breakout.
So as a result of these favorable trading criteria, I said that there was a real chance that we would see a decent breakout if the price breaks through the upper or lower trendline (at around 112 or 110 respectively), and as it turned out, it was the upper trendline that was breached.
USD/JPY Breakout Before and After Results
Here is the pre-breakout chart of the USD/JPY pair….
….and this is what subsequently happened….
As you can see, the price of the USD/JPY has hit 114 after breaking out of its previous sideways trading range, giving a total profit of around 200 points so far.
Final Thoughts
Of course everyone will trade these breakouts differently. Some traders may look for even more profits, possibly equivalent to two or three times the width of the trading range, for example, while others will scale out of their positions in two stages or will have much smaller profit targets than 200 points.
The point I want to get across is that these price breakouts can be very profitable, and although you do occasionally get a few false breakouts (including a few that I have highlighted in previous articles), the profitable ones will often compensate for the losing ones in the long run if you use strict stop losses and maximize your earning potential with realistic profit targets.
If you want to see a live example of a price breakout, you might want to check out the daily gold chart because this is threatening to break lower and breach its support level, as first pointed out here.