Breakout Zones Trading Method and Indicator

Trading breakout zones involves identifying when a breakout occurs, leading to significant price movement. This strategy focuses on the moment the price moves beyond a support or resistance level, signaling either a long or short position opportunity.

Breakout traders must understand the types of breakouts, how to spot false breakouts, and the importance of large price actions over a short period of time. A successful breakout trading strategy requires precise risk management, choosing the right entry point, and setting a stop loss order to minimize potential losses.

By following the trend in the breakout, traders can capitalize on the momentum for profitable trades.

The breakout zones indicator represents a MetaTrader 4 indicator. It is used with forex trading strategies to confirm entry or exit points. In this article, we overview:

• Breakout zones and what they mean
• Finding a trend from a range
• Probabilities
• How to trade breakout zones in Forex

What are breakout zones in trading?

Breakout zones represent the critical phase where markets transition from a period of consolidation to a new trend. These zones can sometimes evolve into another trading range if they establish new highs or lows.

Nevertheless, they often signal the beginning of a trend, especially when there’s a clear break above support or resistance levels, potentially leading to significant price movements.

Markets that are breaking out often coincide with major news announcements, adding to the volatility and excitement of trading these conditions.

Traders can leverage breakout zones by employing straightforward indicators for entering trades at these points, coupled with diligent risk management to navigate the inherent risks effectively.

However, it’s important to approach breakout trading with caution. While these zones offer opportunities for profit, they also present a high risk of loss.

Trading on breakouts without a sound risk management strategy can lead to substantial losses, particularly in fast-moving markets that can reverse direction unexpectedly.

Utilizing excessive leverage or failing to set stop-loss orders can exacerbate these risks, leading to disastrous outcomes.

Therefore, always prioritize risk management in trading. Regardless of how promising a trading idea may seem, every trade is ultimately based on a hypothesis. Neglecting proper risk controls can result in significant financial loss and potentially end a trading career.

Finding a trend from a range – Breakout zones 

Like a butterfly emerging from a cocoon, trends often begin after price breaks out of an already defined pattern of congestion or consolidation.

Prices often move for one reason or another. Central bank statements have been a common cause for a breakout recently.

Traditionally, data releases are the significant cause of support or resistance breaks. They send shock waves through the markets as traders try to integrate new information.

Unfortunately, when news or data hits the market, it’s often too late to catch the breakout in time.

Instead, the risk of entering could be even greater as the chance of a pullback emptying the trader’s account makes the prospect of trying to catch the move risky…at best. It is often better to pause and wait for the trend to develop if you miss the initial breakout.

So, traders can incorporate a very simple technical indicator to help them look for ranges that could eventually turn into breakouts.

Finding an entry point

There are many options to do this; the simplest is to note the high or low before prices started congesting.

Traders can use entry orders to “buy new highs” or “sell new lows.”

If traders want to use an indicator that can help them determine these levels, Price Channels, also known as Donchian Channels, are a great fit. They will show them the “highest high” and “the lowest low” as well as low” over the last x periods.

It often takes more than one try to find break zones.

Breakout zones – Probabilities

When a trend becomes observed in the market, the trader may enter the trade, hoping that the trend will continue. Or, to put it more simply, traders could have the odds in their favour simply by trading in the direction of the trend.

In a range-bound market, often you can’t see any trend. Prices are somewhere between support and resistance. If prices go too high, traders sell; traders buy if they go too low. In order to break out of these areas of support or resistance, the market often needs a catalyst, like news in the media.

And when we have that catalyst, volatility picks up, and prices start to move a lot more. This means that there are plenty of opportunities where support and resistance will be breached during this period of volatility before prices reverse and move in the other direction.

These false breakouts can make trading in this condition very frustrating. This is why it may be best for new traders to focus on the more conventional trend-based market conditions.

Traders often give breakout strategies a lower probability of success because of the reasons we have discussed. If a trader thinks he can normally win on every second trade, he will win every fourth trade.

Since breakouts have a lower probability of success, traders should adjust reward-risk ratios accordingly. They should seek even tighter stops and even wider profit targets.

In The Biggest Mistake Forex Traders Make, we recommend looking for a minimum 1 to 1 risk gain. As breakouts often have a lower probability of success, traders should be even more aggressive in seeking at least $2 for every $1 risked.

How to trade breakout zones indicator in Forex

The key to trading breakout zones indicator is support and/or resistance. These levels that can experience changes in order flow are the same prices traders can look to enter on breakouts.

Pivot points are a very attractive option for breakout traders. Traders can watch these price levels to look for breakout moves while placing entry orders outside. As soon as the pivot point gives way to such a price rise, entry is initiated, and the trader is on position.

Another common option for breakout trading is to include the price channels indicator (often referred to as ‘Donchian Channels,’ after famous breakout trader Richard Donchian).

Price channels 

The price channels show the highest and lowest levels over x past periods (where x is the number of candles the trader wants). When prices approach these levels, they may continue to higher highs or lower lows; and that is the definition of a breakout entry.

The same logic applies to psychological numbers or round levels like 1.3500 for EURUSD or 0.9000 for AUDUSD.

These round price levels often experience more stops or limits. They can bring a trend to a screeching halt, at least temporarily. But when there is a second approach toward this level, it is possible that the number of stops or limits cannot contain all the selling (or all the buying for an uptrend).

This creates one of the most common ways of trading breakouts; incorporate quotes and past market movements into the analysis.

By noting the price levels the market has followed in the past, traders can try to place entries outside of these prices. So, if a move towards these levels is strong enough – you have open position.fOne can combine price action with other support and resistance mechanisms, such as psychological levels, Fibonacci, or pivot points to look for the ‘strongest’ support and/or resistance levels.

The fact that the market has respected these levels in the past through price action can serve as confirmation that the price has been important in the past; if the price approaches again, it might not be more important in the future.