Even if you have just started your journey into forex trading and strategies it is very probable that you have already come across the term "breakout strategy". This type of trading strategy is very common in currency trading and it involves some of the most old and well tested strategies available within the financial market's themselves. On today's article I want to talk to you a little bit about these trading strategies, the definition of a breakout strategy, what one of these techniques usually implies and how they can be used to achieve good average yearly returns in forex trading.
A breakouts strategy is usually defined as a trading system which uses the movements of the market outside a previously defined range to enter and exit positions. A breakout system attempts to exploit crowd behavior and the way this behavior makes the market develop substantial trends. A breakout system attempts to follow trends after they have already been active for a significant period of time, assuming that the trend will continue in the direction of the market.
Due to the fact that trends do not happen all the time in trading and due to the fact that prices tend to whipsaw significantly breakout systems usually need to live through very extensive periods of draw down. Most breakout systems can have periods of loses that range from 1 to 3 years so if you want to trade a strategy like this you need to remember that most of the time you will most likely be losing money. As a matter of fact, very popular trading systems - like the turtle trading system - which are based on breakout strategies have such extensive and usually significantly deep periods of draw down.
Breakout strategies have their moment when the market develops a strong directionality towards one side often being able to make up for years of loses with a single profitable trade. However breakout systems that attempt to profit with a fixed Take Profit value usually suffer from the same deep and extensive draw downs - often with many consecutive loses - only achieving success once the market gets directionality and strong trends are achieved (with a large number of consecutive profitable trades). Therefore it seems that attempting to profit from trends through breakouts will inevitably give periods of extensive draw downs, reason why breakout strategies are very robust, yet not very popular.
Systems based on breakouts - as all other trading systems - have to be developed with long term profitability in mind and with a good idea of the risk and profit targets that will be reached. It becomes extremely important to evaluate the performance of the system over extended periods of time as a statistically significant number of trades must be assessed so that a bigger picture - not including intermediate profit and draw down cycles - is shown. Traders willing to trade breakouts must be armed with strong, long term simulations and a true understanding of how the market works and why the system is able to exploit a tradable market inefficiency, otherwise failure is almost granted.
If you are looking for a strategy that will bring profits across several instruments with a good probability of being long term profitable then breakout trading systems will be a very good place to start. Long term tested systems - like the before mentioned Turtle Trading System - is a good place to start when looking for a robust and reliable trading strategy. However, great care must be taken to apply all system rules precisely as small deviations or negligence to implement some rules - like the ATR adapted money management - will certainly bring loses in the long term.
As you see, breakout trading may be very challenging - as all long term profitable trading is - but in the end, a strong understanding of the trading strategy used and long term simulations with accurate predictions of risk and profit targets will allow you to trade your system with confidence and success despite the long periods of temporary draw down that will appear between equity peaks.
Article Source: http://EzineArticles.com/?expert=Daniel_Fernandez
A breakouts strategy is usually defined as a trading system which uses the movements of the market outside a previously defined range to enter and exit positions. A breakout system attempts to exploit crowd behavior and the way this behavior makes the market develop substantial trends. A breakout system attempts to follow trends after they have already been active for a significant period of time, assuming that the trend will continue in the direction of the market.
Due to the fact that trends do not happen all the time in trading and due to the fact that prices tend to whipsaw significantly breakout systems usually need to live through very extensive periods of draw down. Most breakout systems can have periods of loses that range from 1 to 3 years so if you want to trade a strategy like this you need to remember that most of the time you will most likely be losing money. As a matter of fact, very popular trading systems - like the turtle trading system - which are based on breakout strategies have such extensive and usually significantly deep periods of draw down.
Breakout strategies have their moment when the market develops a strong directionality towards one side often being able to make up for years of loses with a single profitable trade. However breakout systems that attempt to profit with a fixed Take Profit value usually suffer from the same deep and extensive draw downs - often with many consecutive loses - only achieving success once the market gets directionality and strong trends are achieved (with a large number of consecutive profitable trades). Therefore it seems that attempting to profit from trends through breakouts will inevitably give periods of extensive draw downs, reason why breakout strategies are very robust, yet not very popular.
Systems based on breakouts - as all other trading systems - have to be developed with long term profitability in mind and with a good idea of the risk and profit targets that will be reached. It becomes extremely important to evaluate the performance of the system over extended periods of time as a statistically significant number of trades must be assessed so that a bigger picture - not including intermediate profit and draw down cycles - is shown. Traders willing to trade breakouts must be armed with strong, long term simulations and a true understanding of how the market works and why the system is able to exploit a tradable market inefficiency, otherwise failure is almost granted.
If you are looking for a strategy that will bring profits across several instruments with a good probability of being long term profitable then breakout trading systems will be a very good place to start. Long term tested systems - like the before mentioned Turtle Trading System - is a good place to start when looking for a robust and reliable trading strategy. However, great care must be taken to apply all system rules precisely as small deviations or negligence to implement some rules - like the ATR adapted money management - will certainly bring loses in the long term.
As you see, breakout trading may be very challenging - as all long term profitable trading is - but in the end, a strong understanding of the trading strategy used and long term simulations with accurate predictions of risk and profit targets will allow you to trade your system with confidence and success despite the long periods of temporary draw down that will appear between equity peaks.
Article Source: http://EzineArticles.com/?expert=Daniel_Fernandez
