Range traders enjoy taking advantage of sideways moving markets as price toggles between key levels of support and resistance. However, what happens when a range comes to an end? Today we will review how to take advantage of range breakouts.
- Identifying Breakouts
- Setting Breakout Orders
- Managing Risk / Profits
Below we can see the current see today’s breakout of the NZDUSD. Before today’s price action, the NZDUSD was trading between resistance at 8162 and support at .7682. As of this week’s trading open, price has moved outside of our noted value of resistance. This move denotes a price breakout, and on these instances previous resistance will become new support. From this point traders can begin looking for new trading opportunities.
So now that we have learned how to identify a breakout, let’s discuss a trading plan to take advantage of the move.
Learn Forex – NZDUSD Range Breakout
Trading Range Breakouts
Unlike the range trader, breakout traders are looking for key levels of support or resistance to break. If a level of resistance breaks, traders will buy in anticipation of a new uptrend beginning. Conversely, breakout traders will look to sell a break below support. Normally this technique can be used with a series of entry orders even elect to trade a breakout manually through a market order. Regardless of the method of entry, nullified, and fresh positions will look for a new trending market.
Below we can again see the NZDUSD daily chart. Traders looking to trade today’s breakout can look to buy the NZDUSD as long as price remains over the previous line of resistance near .8162. Traders will want to buy above resistance because traders are looking for this fresh higher high to be the beginning of a new uptrend. Now traders simply need to manage risk, and find profit targets to complete their trading idea.
Learn Forex – NZDUSD Breakout Entry
Manage Breakout Risk
As with every trading strategy, traders should consider their risk prior to entry. One easy way to manage stop placement, is to set the stop in the middle of the previously defined range. The previous range on the NZDUSD measured 480 pips. Traders can find half this value and subtract it from their entry price to set up a stop order.
Using the range also makes setting a positive Risk/Reward ratio easy. Traders can initially look to take profit after a full extension of the previous range. When combined with a stop of half this distance, a 1:2 Risk/Reward ratio will be created.
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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