Breakout Forex strategy
Trading sessions in the Forex market are one of the most important elements, thanks to which the market operates around the clock.
The thing is that each trading session is tied to a specific region where a large exchange platform is located.
Thus, when a session closes in one region, it immediately begins in another. Depending on your geographic location, you can also observe surges in activity on certain trading instruments.
So, for example, quotes of the American dollar move very actively during the American trading session , the European currency is active during the European trading session.
And Asian currencies such as the Japanese yen are active during the Asian trading session.
This is why you will never see strong movements in the US dollar or the European currency at night, while the yen can reach new heights.
General principles of the Breakout Strategy.
The "Forex Breakout Strategy" was developed due to a simple and well-known pattern in the activity of certain currencies during trading sessions. During a given trading session, a currency's movement creates a specific trading range with a minimum and maximum.
These levels created during the session are extremely significant, as breaking them triggers renewed price momentum. Such surges are particularly noticeable during the transition from the Asian to the European trading session , as the European currency seems to awaken from a period of complete inactivity.
Similarly, if the euro gains significant ground, the dollar tries to regain its position during the American trading session. Therefore, the strategy doesn't focus on the specific direction of the currency's movement, but rather bets that if a specific session boundary is broken, the price chart will break a new high or low and create its own range. To achieve this, the strategy uses two pending orders in opposite directions.
Preparing the strategy for work
Trading sessions can be easily manually defined in the MT4 trading terminal based on time, but to make the trading process more convenient, we'll use a special indicator. To do this, go to the end of the article and download all the necessary strategy elements.
Next, open the terminal's data directory using the File tab and copy the indicators to the "Indicators" folder, and the template to the "Template" folder. After updating the tools in the navigator panel, open the template list and run "Breakthrough of Trading Session Highs and Lows." You'll end up with a working chart like this:
Breakout Strategy Features and Trading Signals
The "Breakthrough of Trading Session Highs and Lows" trading strategy can be applied to any time frame, as a trading session is strictly limited in time. Therefore, the number of candles is irrelevant, as the i-Sessions indicator strictly displays specific trading sessions and their highs and lows.
As you may have noticed, the indicator highlights them as rectangles, with the Asian one highlighted in light brown, the European one in gray, and the American one in blue.
The breakout strategy is designed for currency pairs that include European or American currencies. For example, the most popular pairs for this strategy are GBP/USD and EUR/USD.
So, now let's move on to the signals. This strategy uses two pending orders: a buy stop and a sell stop, which must be placed at the trading session high and low. The buy stop is placed at the trading session high, and the sell stop is placed at the trading session low. See the example below:
The example shows pending orders placed at the lows of the Asian and European trading sessions. Some traders don't delete the second pending order if the first is triggered, but to avoid creating a lock when the first is triggered, the second must be deleted.
Setting a stop order
The ATRonChart indicator is used to determine stop order levels. It draws a price channel around the price using dotted lines. When a buy stop order is triggered, we place our stop order a couple of pips below the lower channel boundary, and when a sell stop order is triggered, we place our stop order a couple of pips above the upper channel boundary.
Alternatively, you can place an order using the Parabolic or Fractal indicator. See the example image below:
Profit setting, money management
While setting stop orders and placing pending orders is straightforward, defining targets in these types of strategies always poses problems.
For breakout strategies, you can use two options for setting your profit. The first option is to set your profit equal to your stop loss order, while the second option requires you to measure the number of points from the minimum to the maximum of the trading session and set your profit equal to half that distance.
In terms of risk management, it's essential to calculate your trading lot size . Try to adhere to the classic risk management model, meaning your loss on a single position should not exceed three percent of your deposit.
