These guidelines for trading breakouts from support and resistance or trend lines work well in the forex markets, but are also easily applicable to equities, options, futures, or baseball cards, says Sam Seiden.
The key to profiting in any market is to have a simple strategy that has you buying low and selling high. The forex markets, in particular, are a set of markets that allow traders, on occasion, to buy high and sell even higher.
The strategy that offers us this opportunity is the breakout. While this is a strategy that has been around as long as trading, few traders understand the anatomy of what’s really happening behind the scenes before, during, and after a breakout.
The forex markets are markets that move. In a market that has significant and consistent movement, using breakouts properly can be very appropriate. As with any strategy, there is a right way to understand and use the breakout and a wrong way.
See video: Forex Strategies: The Breakout Trade
Once you have breakout pattern recognition down, this does not guarantee success. Successful market speculators not only recognize profitable chart patterns, but they have the discipline and personality needed to follow rules. Not just any rules, but rules that give them a significant edge over the competition.
In this piece, we will discuss the two most popular breakout entries: support and resistance breakouts and trend line breakouts. We will also compare the traits of successful and unsuccessful traders.
Support (Demand) and Resistance (Supply) Breakouts
Once in a while, you’ll hear someone say that breakout trading worked best in the stock market in the late 90’s. Well, someone who learned to trade in the late 90’s and does not understand breakouts might say that.
In those days, you could buy anything at almost any time and make money. Today, breakout trading is where you see most of the money being made in forex trading by those who truly understand the structure behind a true breakout; those traders are getting paid by those who don’t understand.
Click to Enlarge
Take a look at the chart above. Notice the horizontal resistance line and let’s work left to right in our understanding of what’s really happening behind these candles in the chart.
The first circled pivot high on the left becomes that pivot high because supply in this market greatly exceeds demand at that price level. When price reaches the line, some of the sellers that make up that supply get to sell, but there is still much more supply than demand, so price has to fall.
The drop from that first circled area is significant, as we would expect. The next time price revisits that level, it declines again, but this time, the decline is shallow compared to the prior visit. This is because each time you revisit the level, more of the sellers that make up that supply get to sell, so the supply and demand equation is becoming more in balance.
The analogy here is the chopping down of a tree (not a great example for nature lovers like myself, I know). With each chop, you are removing mass from the tree, and therefore, the tree is more and more likely to fall with each chop.
In trading, the mass is the supply (sell orders) and demand (buy orders). Moving left to right, price comes back to that level a third time and falls, but again, the decline is shallow, suggesting that there is simply not as much supply at that level remaining.
See related: It All Starts with Supply and Demand
Next, price revisits that level a fourth time, but this time, instead of declining from that level, it bases sideways, suggesting there is no longer more supply than demand. This is when you get ready to buy because in forex trading (and any other market, for that matter), price is likely to move higher.
One would feel comfortable taking a low-risk entry on a breakout here because the objective price action tells us the supply and demand equation at that price level is flipping and that price is about to rise. This is a trade we see forex traders take in class all the time. This is also a trade you will see taken in our Extended Learning Track (XLT) – Forex Trading program.
Does every trade work? Of course not; that’s trading. This is why it is so important to understand what is driving the movement of these candles. This, in turn, helps you understand structure of a breakout.
NEXT: The Trend Line Breakout
Incoming search terms for the article:
- supply and demand - sam seiden (2)
- 4shared com sam seiden supply demand (1)
- support and demand areas in forex trading (1)
- supply demand forex (1)
- Supply and demand stocks Sam Seiden (1)
- sam seiden xlt videos on basics (1)
- SAM SEIDEN XLT VIDEOS (1)
- sam seiden xlt strategies (1)
- sam seiden pairs forex (1)
- sam seiden 4shared (1)
- sam seiden (1)
- ronald j Wills forex trading apprentice (1)
- forex extended learning track (1)
- chart patterns sam seiden (1)
- xlt videos sam seiden (1)
