by kelly Price
If you want to catch the big profits by forex trend following you must incorporate breakout trading in your forex trading strategy. Here we will look at why the concept works and give you a FREE proven system.
What is a breakout?
A breakout is one that penetrates resistance or support to make a new high or low.
Why are they so good to trade?
The fact is that most big trends develop from new market highs or lows and this can be seen on any forex chart.
How do you spot good ones to trade?
Not every breakout of course develops into a trend - so you need to spot valid ones.
A valid breakout normally consists of 3 or more tests in two separate time frames.
The more tests the better and the more time frames and wider they are apart, the more valid the breakout is likely to be.
Why don't all traders make money with them?
Most traders don't bother with breakouts because they want to wait for the pullback.
They think they have missed part of the move and want to wait for a "better price" - on valid breakouts, prices don't come back and the trader misses the move.
Other traders buy breakouts without confirming price momentum - but you must confirm them!
How do you confirm momentum?
Simple - just look at some momentum oscillators (we don't have time to discuss them here in detail simply check our other articles) and if they support the breakout go with it.
When you do your stop it's obvious - just below the breakout point.
Despite the fact that breakouts work, most traders simply can't buy new highs and lows - but if you do you can make some great profits.
You need to be patient though - good breakouts don't come around every day and you also need to confirm the move.
If you do the above, you can make money with breakout trading, sure its simple but don't be deceived - many of the world's top forex trading systems are based on breakout methodology.
A Simple Breakout System
Here we will give you a free breakout system which you can use right now.
It was developed by trading legend Richard Donchian back in the 70s to trade commodities but it works great on currencies here it is:
Close short positions and reverse to a long position when a price exceeds the highs of the previous 4 weeks - reverse long positions and take a short position when a price falls below the lows of the previous 4 weeks.
Well you can't get simpler than that!
Test it and you will see it works as forex markets trend well.
The downside is of course when markets trend sideways the system will get chopped and incur losses. To cut drawdown You can alter the rule to:
Enter trades on the 4 week rule - but exit the position on a shorter time period and go flat. 1 or 2 week cycles are commonly used; you then look to re enter on the next 4 week signal.
The beauty of the above as a currency trading system is its simplicity, making it very robust and profitable.
Also consider this it's been used by Richard Dennis and many other trading legends so look at it!
If you want to make bigger profits from forex trend following, you need to incorporate breakouts in your forex trading strategy. You can use a non mechanical one based on the above guidelines above - or you can use a simple but powerful mechanical system like Richard Donchian's 4 week rule.
Make breakouts part of your forex education and you will enjoy bigger profits from forex trend following.
About the Author
NEW! FREE PDF REPORTSCATCH THE BIG TRENDS NOW!
Get free essential trading Pdf's on catching the big profits from the big moves and more on Breakout Trading Systems visit our website at: http://www.forextrendfollowing.com
