This strategy is one of the most efficient for trading during trend moves. As a rule, the more clearly defined the uptrend or downtrend, the more opportunities for profit.
The “support/resistance breakout” strategy involves the following steps:
Identifying the price movement direction. If there is an uptrend, we should expect a resistance breakout. If there is a downtrend, we should expect a support breakout.
As soon as the price makes a real break through the target level, we open a trade: in case of a resistance breakout, we buy a currency pair; in case of a support breakout, we sell it.
Stop Loss is usually placed above the broken out support and below the broken out resistance. The distance between the level not respected by the price and Stop order should slightly exceed the average volatility of a currency pair.
We should take the profit as soon as the price shows signs of an incipient retracement. Quite often, the price reverts back to the broken level, which can completely wipe out the potential profit.
Let’s take a look at the examples where this strategy can be applied.
Support Breakout
The EUR/USD currency pair is indicating a downtrend. The image below shows how it breaks the next support level.
As soon as the bearish candlestick closes below the broken level, you can sell.
Support Breakout
Resistance Breakout
In this example, the price of the USD/JPY currency pair overcomes the resistance level. As soon as the bullish candlestick closes above the resistance zone, it may be regarded as the level breakout. Such a situation is favorable for buying.
Resistance Breakout
The advantage of the “support/resistance breakout” strategy is that it allows you to use strong price movements. Thus, the risk of losing a potential profit is minimal.
On the other hand, there is always a chance of a false breakout. In this case, the price may revert back to the previous trading range and trigger Stop Loss. So before entering a trade, it’s recommended to pay attention to additional signals confirming that the breakout is real.
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