The Daily Breakout Strategy

This article written by Maite Krausse was originally published in the november 2014 issue of Traders' Magazine.

• Maite Krausse has been interested in the stock markets since taking her degree in business administration. Today she is a professional day trader and is specialised on forex. Her husband and Maite offer professional support to traders – finding daily trading signals, analysis and tips.

How to Trade Breakouts in Forex

It is always the same question for traders of all experience-levels in Forex: Which strategy achieves the most profit and which trading system will save the account in the forex market? We cannot promise the Holy Grail, because it simply does not exist in trading. But there is a helpful strategy that achieves high profits in volatile market phases: the breakout strategy.

Simple Approach – Huge Effect 

Breakouts are best used with the majors, the five major currency pairs. We use the volatile trading times of the European and American trading session (8 am until 10 pm Central European Time) to cover the fundamental events. The price range that the price shall “break” is formed from 12 am to 8 am CET and offers the trader the basic trading approach for the following day at 8 am. This  range is valid for the particular day – you’ll define it again on the next day and therefore this strategy is useful for day traders. The highs until 8 am are the upper border and the resistance level and the lows are the support levels. If the price exceeds the high or undercuts the low, the buy order above the high or the sell order below the low is executed. The trader does not need to watch the chart the whole time – we enter pending orders at 8 am for the buy and sell entries. As soon as a buy or sell order is executed the trade is managed all day – we use a 1:2 risk-reward ratio on quiet days and a risk-reward ratio of 1:4 on economically important days, for example a Fed decision regarding interest rates. We do not risk more than one or two per cent of trading capital per trade – in contrast to four or eight per cent of profit possibility. Trade management is simple with an automatic trailing stop of 15 to 25 pips.   

Entries 

We observe the price range between 12 am to 8 am CET in the 15-minute chart. During this time we determine the highs and lows. We enter two to five pips above the high or two to five pips below the low. Furthermore, we look at support and resistance levels in the hourly chart. We determine sell orders above resistance and sell orders below support. 

Exits 

Greed is one of the cardinal sins in trading. But every trader knows the feeling of a trade in profit and you want to achieve even  more pips. This is a very human feeling and therefore you need a strong trading plan with fixed take-profit rules. We calculate it based on the RRR and we follow it strictly. For example, we can determine the stop-loss (SL) at 20 to 30 pips. The take profit (TP) is determined at 40 to 100 pips, depending on market fluctuation. We choose a smaller TP in quiet market phases and a higher TP on days of interest rate decisions and other big events. If a trade is stopped out with a loss, we can re-enter on the same day, again with a pending order. The breakout strategy is now clearly determined and that helps the psyche of the trader – cancelling out greed and fear. You should always follow your entry and exit rules and you should accept false breakouts or huge profits after your TP.   

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