When to enter a trade has always been one of the top priorities for traders, particularly for those who are relatively new to the markets.
This is normal and understandable.
Because numerous opportunities come up every day. And it can get challenging if you don’t know what to look for - i.e. what is a good trade set up and when is a good time to enter a trade?
In this article, we will look at the breakout entry strategy – one of the most popular trading strategies that can be applied whether you’re trading forex, indices, commodities and other instruments.
As the term suggests, a breakout happens when a price of an instrument (e.g. forex pair, oil or gold) breaks out or breaches a support or resistance level.
Before we go further, it’s a good idea to know what are support and resistance levels. Once you know that, it will become much clearer to see the price breakout from those levels.
If you’re using technical analysis for your trading, looking at a chart over a period of time will show some support levels – areas or specific levels where prices are usually supported.
Support levels provide what is called a ‘floor’ for prices. This means prices usually stay on this level because it has the support (of buyers).
It is the opposite of a support level.
Looking at a chart, you can find resistance levels – which are areas or levels where prices are usually stopped (resisted) and can’t go any higher for a period of time.
Here is an example where you can see the support and resistance levels. If you want to use the breakout entry strategy, it is important you determine the support and resistance levels.
This is because support and resistance levels are seen as strong signals where prices tend to stop.
One way of using the breakout entry is to get into a trade when the price has breached a resistance level. For many traders, a breach of the resistance level means the price has the momentum to go higher.
The thinking behind this is a breach of resistance can mean traders are bullish and will support the price move to a higher level.
While this may not always be the case, many traders use this breakout from a resistance level as an entry point.
On the flipside, you can use the breakout entry when the price has breached a support level. A break of support is usually seen as a signal that prices may go down further. Some traders use this breach of support to take advantage of falls in prices.
Knowing what support and resistance levels are and how you can use them to identify when prices are breaking out of these levels, you can use this entry strategy for your trading.
Whether you’re using a demo account or a live trading account, you can use the charting function of the MT4 trading platform to identify support and resistance levels. It is a great idea to try and identify the support and resistance levels on different instruments at different time frames as well.
Once you are familiar and confident in identifying these levels, you may find it much easier to spot any price breakouts.
Price breakout is only one of the many entry strategies you can use for your trading. If you want to learn more about other entry strategies, you can check out our eBook about different entry and exit strategies.
Another important consideration for you as a trader is that while trade entries are important, they are only one component of your trading.
It is important to have a solid entry strategy. But it is equally vital to have a strict risk management and exit strategy. All these combined – entry, risk management and exit strategy – can help you on your way to become a good trader.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Forex trading robots use computer algorithms to help determine the best price at which you should buy or sell a currency pair. Learn about EAs here.