Of the three most common trad forextradingbrokerwebsiteg tools used in the forex market, the most difficult to learn cashback forex often the breakout type of tradingBreakout trading means forextradingwebsiteonline forex trading site want to see prices break support or resistance levels and form a new trendWhen resistance levels are broken, traders tend to want to go long; and when support levels are broken, traders tend to want to go shortThe following chart provides a very good example. The core of trading breakouts is that traders believe that support and resistance levels will block future price movements so when these levels are broken, these stumbling blocks no longer exist so that traders can seek short or long opportunities Although this is indeed the essence of breakout trading, it is not so easy to actually do it – this is because what makes breakouts extremely profitable volatility, but also brings great risk to breakout trading This article will detail all aspects of breakout trading, and more importantly, how investors can tailor their trading strategies and trading methods to face these highly tempting, but potentially risky breakout trades looking for volatility Before we start learning how to trade volatility, we can visualize the volatile trading environment to A good example of this phenomenon is the formation of price ranges usually seen before the release of major news or economic data The chart below shows the range formed before the release of the May 2012 non-farm payrolls data: Taking the risky event of non-farm payrolls as an example, it is As the chart above shows, the price fell below the support level in response to the non-farm payrolls data just as it was released This means that the data brought additional volatility to the market and triggered a breakout that many traders rely on for profits But on the other hand, a breakout triggered by rising volatility also carries a great deal of risk – so traders need to be more careful in their risk management so that they can fine tune the volatility The other side – false breakout volatility is indeed a source of profit, but also has its dangerous side – because traders never know how long the price movement will last A good example is a false breakout: in some cases, support or resistance levels may be broken briefly, but the price does not continue to move in that direction This is what we commonly call a false breakout, meaning that the key levels are broken, but the price does not continue to move in that direction The chart below is a good example: False breakouts are actually quite common, as most breakouts occur during periods of market oscillation (when the price continues to move for a longer period of time) So when trading breakouts, traders need to be rational in their risk management to reduce the possible impact of false breakouts This makes setting As the chart above shows, false breakouts are the nemesis of breakout traders. This is because there is no way to know how long a false breakout will drive prices against the trend, potentially wiping out earlier profits before the trader can actually start taking profits. Poor risk management can cause traders to lose more money in volatile markets and is one of the key factors that separates professional traders from amateurs. According to our research, traders are correct more than half of the time about future price movements, but they lose more in losing trades than in profitable ones because they do not set the risk-reward ratio at least 1:1. So, when trading breakouts, traders should set the risk-reward ratio higher than usual, for example 1:2 (for every $1 of risk you take, you should seek $2 of reward), and the following chart is a good example of a 1:2 risk-reward ratio: When a trader sets the risk-reward ratio to 1:2 when the trader sets the risk-reward ratio to 1:2, the trader only needs 2 out of every 5 trades to be profitable to make a significant net profit, as shown in the chart below: By analyzing the average pips change in EUR/USD for each session of the day provided by DailyFX Research below, you can develop different trading strategies based on the different volatilities offered at different times of the day: With the chart above, we can see that EUR /USD at the end of the Asian session and the beginning of the London session (3:00 on the X-axis), which means that volatility is also rising, so traders can consider more breakout trades after the London session, as the success rate of breakout trades will increase significantly with the rise in volatility Another important part of risk management is leverage Using the DailyFX study above, you can see that traders with larger equity accounts ($9,999+) typically use a much lower effective leverage ratio than traders with smaller equity ($999+), but those who utilize a 5:1 leverage ratio are much more likely to be profitable than those who utilize a 26:1 leverage ratio– those who use extreme Traders with extreme leverage ratios are profitable only about 21% of the time; instead, traders with normal leverage ratios are 37% more likely to be profitable At DailyFX, we recommend that traders keep leverage ratios below 10:1 – meaning that for every $5,000 of equity owned, traders should have a position size of less than $50,000 Risk Management Overview In summary First, traders should seek a good risk-reward ratio (i.e., they should seek more profit than they take risk) and, in times of high volatility, traders should reduce leverage to less than 10:1 to ensure the safety of their capital
