- Breakout traders should first find support & resistance
- Entries can be set as close as 1 pip above these values
- Support and resistance can also be used for managing a position
Today we will continue the Definitive Guide to Scalping as we focus on scalping breakouts.
GBPCAD Early Morning Breakout
Trading a Breakout
The first key to scalping breakouts is to identify key levels of support
and resistance. This can be done through a variety of methods mentioned
in the 4th installment of the Definitive Guide to Forex Scalping. Once
found, setting up a breakout trade is a straight forward process. In the
event of a level of resistance breaking, traders will look to buy. An
example of this is depicted above using todays GBPCAD price action.
Conversely, traders will look to sell when a key level of support falls.
The big question is always where to enter into the market in the event
of a breakout. Theoretically a breakout occurs if a level of support or
resistance is breached by even 1 pip! This allows aggressive scalpers to
get into the market as soon as possible. Some traders may flock to this
methodology as it lets traders maximize their profits when a trade
moves in their favor. However, getting into the market first also will
expose you to be the first trader stopped out in the event of a false
breakout. Traders that need further confirmation can wait for a 30
minute candle close and then make a decision whether to enter the
market.
GBPJPY False Breakout with Stop
Risk and Breakouts
The first question I inevitably get regarding breakout trading, is how
to prevent false breakouts. While I understand that no one intends to
take a loss, it will happen at some point regardless of the strategy
that you use. With that being said, there is NO way to prevent false
breakouts. All we can do is to manage our risk when price moves back
against a breakout.
Above is an example of a false breakout this morning on the GBPJPY.
Notice how price broke cleanly through support, and then abruptly
changed directions. Even though at one time the trade might have been
profitable, when the market moves back above the designated breakout
area, traders should have a plan for exiting the market. When selling a
breakout of support, stops can be placed above this value which becomes
new resistance.
GBPCAD with Risk:Reward levels
Risk VS Reward
Overall, trading breakouts is an exciting way to approach scalping. It
should be noted since breakouts occur during times of market volatility
it is imperative to maximize your profits when the market breaks in your
favor! This can be done byusing a positive risk reward ratio. This
means traders should look to make more in profit, relative to what is
being risked through the placement of a stop order.
Highlighted above is a 1-2 Risk:Reward ratio with traders looking to
make 2x the amount of profit on a breakout relative to the amount
risked. This ratio can be improved by either reducing the amount risked
or increasing the amount of pips in profit targeted on a position.
