Forex Supply and Demand: Breakout Trading Strategy - ForeXposed

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Thursday, March 16, 2017

Forex Supply and Demand: Breakout Trading Strategy

On forex trading, one of entry that can be done is to utilize the breakout as an entry point. This could occur when the prices are leaving the area of consolidation, support, resistance, scalping line, Fibonacci levels and etc. To make it easy we make an analogy;

A pasture (chart) with a flock of Bull (price movements) are running around here and there. Now imagine that there is a fence in front of the Bulls. This fence is a representation of the level of support/resistance, Fibonacci, pivot, and others. When the price approached these levels on the chart, a lot of possibilities could happen. But generally there are three things may happen:

Hard Barrier

Imagine a flock of raging bull around a grassland approaching the fence. Each step brought them approaching the fence and finally crashed into the fence. But none bull that can pass through the fence, they managed to approach the fence, but not strong enough to get through. They try with a vengeance to pass it but still can't afford.

Now replace the bull with a price, fencing with the support level is just for example. Means that support level points act as a sturdy fence, preventing the price to move even further. So the price approaching the support level, sometimes slowly or rapidly, but still can't pass through. Can only break this level (of the fence) a pip or two pips, but the prices really can't penetrate the defensive support.

This case often happens and resulting in the price to reverses direction. In this kind of situation, obviously, you don't want to do breakout entry.
Forex Supply and Demand: Breakout Trading Strategy

Barrier Break

Once again, imagine a flock of bull that was running around in the grass approaching the fence. The more they approach the fence, the faster the step swing. Finally, when arrived at the fence, WOINGGGG, a flock of Bull flying, jump it easily!!! As if the fence was never there and they kept running faster.

Once again, replace the bull with the price, fencing with the support level is just for example. Now, support level could not resist the price swift. Prices broke through rapidly and kept going like there is no barrier at all. This is the optimum situation to do breakout entry because we are witnessing strong momentum which accompanies the price, this is a perfect place to enter a trade.
Forex Supply and Demand: Breakout Trading Strategy

Barrier Trickle

Back we met with a flock of bull that was running around approaching the fence. They can run quickly or slowly, it's not important. When approaching the fence, they can not jump it!!!

This bulls retreated one step or two step and will try to jump again. They do this a few times, and some of the bull successfully jumped over the fence. Motivated because saw some of the flock success to jump to the opposite side, another Bull tries to jump, until finally, the entire bull managed to do the jump.

In this situation, the support level is able to withstand the early fierce of price movements. But slowly, surely the price was able to penetrate some pips of the support defense.

Could have been a little backward after the price breakdown, but will move on trying to penetrate more space again, in the end forming a strong momentum and broke through the support level as a whole.

Barrier trickle is the most common situation, where you'll find it at many places on the chart when prices were having difficulty in passing a level (fibonacci, pivot, s/r etc.). However, with a little extra time, the price collecting momentum that is necessary to break through the defensive line.
Forex Supply and Demand: Breakout Trading Strategy

If you find this kind of situation, you can consider to doing a breakout entry. But you have to consider what is referred to Price Reliability.

The price is not perfect, say we have a support level at 1.3500 and prices are near the level. When the price hit 1.3500 and unable to pass through, he will try several times. If for example, he can break 1 pip to 1.3499, then don't be quick to assume that the level of the defense has broken. In your forex broker probably noted at 1.3499, but other forex brokers could be still at 1.3504 (5 pips higher).

Price is not the same between broker forex, so don't hurry to entry when the price break. The key is to observe it in full and let the price guide you shortly after the break. The price will tell you by shows his reaction at the level, whether to break completely or turn direction.

If you need to see the price action closely, you can move from H4 frame to M5 or M15. If you see a flock of bulls was running approaching the fence from a hilltop, the bull may look like tiny ants. But if you stand on the side of the fence, you can see their behavior, one at a time, approaching the fence.

So the conclusion is not doing entry instantly when the breakout happens but analyze and decide what is being done by price.

Realistically, as a forex trader you only have a little time to analyzing, so it needs experience but the longer you observing the price action you will be more understand about the price behavior.