According to http://www.thefreedictionary.com/break+out , break out means to begin or arise suddenly. Break out in the Forex market is defined as a price movement in one direction after sideways consolidation phase. Break out can be a break up (the market moves up) or break down (the market moves down). Below is a good example of a break down.
The important key in break out strategy is the ability to identify a consolidation phase. In the market, a trader does not know when or how big the next expansion is going to be, however, by identifying a consolidation phase, a trader prepare for the next market expansion.
From the above picture, notice that the market has been in consolidation for certain times. The first step would be determining the resistance and support level, then, place pending order “Buy Stop” and “Sell Stop” to anticipate break out in both directions. After the market starts to break the resistance or support level, and executes one of the pending order, the opposite pending order can act as the protection in case the market reverses. If the market picks its direction, just delete the other pending order.
Usually after consolidation phase, there will be a momentum, as there is a lot of traders trying to catch this new move/trend. Then, profit taking would take place after two or three candles, one ATR, when the candle body starts to shrinks, or momentum slows down.
Break out strategy has high probability of winning. It may not give a huge profit in one shot, but since it has a high probability of winning, it can be implemented frequently to produce constant income.
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