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The Forex Breakout Strategy You Need to Master

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There are dozens of breakout strategies available to traders, but the Forex breakout strategy you’re about to learn is my personal favorite. This strategy has been responsible for some of my largest gains over the years.

In this lesson, you will learn how to identify the setup, when to enter the market as well as how to identify possible targets. We will also take a look at several examples on both the 4-hour chart as well as the daily chart. I have found these two time frames to work best when trading this breakout strategy.

What is a Breakout?

Before we get into my favorite Forex breakout strategy, let’s first define the term, “breakout”.

A breakout is any price movement outside a defined support or resistance area. The breakout can occur at a horizontal level or a diagonal level, depending on the price action pattern.

Let’s take a look at two illustrations of one of the more common breakout patterns that occur in the Forex market. The first illustration shows a bullish breakout pattern.

forex bullish breakout pattern

Notice in the illustration above, we have a market that is trending up but has found resistance at a horizontal level. After two unsuccessful attempts, the market finally breaks through resistance. This signals a bullish breakout from a key resistance level.

The next illustration we’re going to look at involves a bearish breakout.

forex bearish breakout pattern

Just as you would expect, the bearish breakout is similar to a bullish breakout, only this time the market breaks to the downside. After two unsuccessful attempts, the market finally breaks through support. This signals a bearish breakout from a key support level.

The reason these breakouts are such an important trading strategy is because they often represent the start of increased volatility. By waiting for a break of a key level, we can use this volatility in our favor by joining the new trend as it begins.

The Only Forex Breakout Strategy You Will Ever Need

This particular Forex breakout strategy is one I have used for years. It has become my favorite pattern to trade, partly because of its reliability and partly because of the more than favorable risk to reward ratios it often produces.

There are four parts to this Forex breakout pattern.

  1. Support
  2. Resistance
  3. Breakout
  4. Retest

forex breakout wedge pattern

The illustration above is very similar to the first two illustrations. The major difference here is that instead of having one trend line and one horizontal line, we have two trend lines. One trend line is acting as support while the other is acting as resistance. This forms what’s known as a “wedge”.

The breakout to this pattern occurs when the market eventually breaks to one side or the other. While a wedge is typically a continuation pattern, I tend to trade it based on whichever way the market breaks. In other words, I let the market show its hand before making any considerations about future price movement.

Now let’s apply this same pattern to a USDJPY 4-hour chart.

usdjpy 4 hour forex breakout

Notice how in the chart above, the market had worked its way into a wedge pattern. As the market began to consolidate tighter, it eventually broke wedge support and subsequently retested this support level as new resistance.

This retest presented traders with a perfect opportunity to enter short.

Executing the Forex Breakout Strategy

To get a good idea of the setup in action, let’s take a look at each step including the entry strategy and where to place your stop loss.

Entry

Most times your entry will come on a retest of former support or resistance. However, it’s important to note that depending on how strong or weak the market is, you may not get a retest. We will discuss this in greater detail later in the lesson. For now just know that it’s best practice to enter on a retest of former support or resistance, depending on which way the market breaks.

Stop Loss

Your stop loss should be placed above or below the breakout candle, at a minimum. In the case of the USDJPY breakout pattern below, your stop loss should be placed above the candle that broke support.

usdjpy 4 hour forex chart breakout entry

In the chart above, the market broke wedge support on the breakout candle and subsequently retested former support as new resistance. This retest presented an opportunity to get short with a stop loss above the breakout candle.

Setting a Target

Now that we know where to enter and where to place our stop loss, let’s discuss how to set a target. As you may well know, I’m a huge fan of using simple price action levels. So you can probably guess how we’ll go about setting a profit target.

Here is a much broader look at the USDJPY chart. This time, we’re looking at the daily time frame to see if we can identify a logical target for our breakout trade.

usdjpy daily forex chart profit target

The first thing you’ll notice is the strong support area that has been in place for several months. This makes for an ideal area to target for our trade setup.

So what kind of risk to reward ratio did we get out of this trade setup? Let’s take a look.

usdjpy 4 hour forex chart risk to reward

In the USDJPY 4 hour chart above, we can see that the stop loss was 13 pips from the entry while the take profit was 50 pips from the entry. This gives us a 3.8R (50 / 13). In other words, if you had risked just 2% on this trade, you would have made 7.6% (3.8 x 2%).

While that’s an impressive gain on its own, what’s even more impressive is the fact that you would have made 7.6% in just 32 hours.

Further Analysis

Let’s turn our attention to another example of the Forex breakout strategy. This wedge pattern occurred on the GBPNZD 4-hour chart. One major difference here is that there was no retest of former support once the market broke to the downside.

gbpnzd 4 hour chart wedge pattern

Notice in the GBPNZD chart above, the market failed to retest former support before dropping 430 pips. But just because the market doesn’t retest former support doesn’t mean we have to miss the trade.

The retest that we look for as part of this Forex breakout strategy typically comes within the next few candles. So if the market begins to move sideways for more than three or four periods, there’s a good chance that the market won’t give a full retest.

Let’s take a closer look at the GBPNZD trade setup.

gbpnzd 4 hour forex breakout pattern

In the GBPNZD 4 hour chart above, notice how the market begins to move sideways for several periods. This is a good indication that the market lacks the strength to retest former wedge support. When you see this happen, it’s generally a good time to use a market order to join the forthcoming trend.

Here is the GBPNZD breakout trade from start to finish.

gbpnzd 4 hour wedge breakout

For this setup, our stop loss was 45 pips from the entry. Remember that you want your stop loss above or below the breakout candle. Because this is a short setup, our stop loss was placed above the breakout candle.

Our take profit, on the other hand, was 175 pips from the entry. The target was identified by the recent low which was made several weeks prior. Note that the market gapped down the following week and ran for another 150 pips before reversing.

Although this looks great in hindsight, the logical target at the time was 175 pips away, which still produced a very healthy 3.9R trade. So if you had risked 2% on this trade, you would be left with a profit of 7.8%. This particular setup took just 36 hours from start to finish – not bad to be able to make a 7.8% profit in 36 hours while only risking 2%.

Forex Breakout Strategy: The Real Potential

As I bring this lesson to a close, I want to leave you with one last setup. This particular breakout occurred on the USDJPY daily chart and represents what’s possible with the Forex breakout strategy you learned today.

usdjpy forex breakout on the daily chart

The first thing you’ll notice is the length of time the market consolidated within this wedge pattern before breaking higher. The setup above formed on the daily chart, so from start to finish this consolidation period lasted for 180 days.

This brings me to an important observation about the Forex breakout strategy – the longer the market consolidates, the more volatile the breakout will be. This isn’t always the case, but 9 times out of 10 the market respects this idea of matching the length of consolidation to the level of volatility.

For those who were able to get in this trade at the breakout point and ride the trade until the consolidation period (take profit level) there was a massive gain to be had. A stop loss below the breakout candle meant a 50 pip stop with a potential gain of 600 pips. That works out to a very healthy 12R trade. At just 2% risked you would have made a staggering 24% profit.

Although rare, these 10R+ trades do happen from time to time. And with the knowledge you’ve gained in this lesson, you will be able to identify and profit from these patterns with ease.

Summary

I hope this lesson has opened your eyes to what’s possible with a simple Forex breakout strategy. Just remember that like any other trading strategy, this breakout strategy is not without flaw. Therefore always be sure to maintain a proper risk to reward ratio and use a favorable stop loss strategy on every trade.

We covered a lot of content in this lesson. Here are some of the highlights to keep in mind as you begin to implement this trading strategy into your game plan.

  • A breakout is any price movement outside a defined support or resistance area
  • The Forex breakout strategy has 4 parts: support, resistance, breakout and retest
  • The retest of former support or resistance provides a trader with an opportunity to enter the market
  • If a market begins to move sideways for more than three or four periods following a breakout, there’s a good chance that the market won’t produce a retest of former support or resistance
  • Your stop loss should always be placed above or below the breakout candle (at a minimum), depending on which way the market breaks
  • It’s best practice to use price action levels to identify potential targets for this breakout strategy – a good place to start is the recent swing high or low
  • As a general rule, the longer a market consolidates the more volatile the resulting breakout will be

Your Turn

Do you use a similar Forex breakout strategy? Or maybe you just have a question about this lesson. Either way, I’d love to hear from you.

Leave your comment or question below and I will get back to you within 24 hours.

About the Author Justin Bennett

Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...

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  • thank you for post…question – on last image – why we don’t buy on previous high?

    • Selwyn says:

      Hi ProfitF,

      There was no confirmation of a breakout on the previous high, since though the candles tested the resistance none of them actually closed outside of it.

  • Juan M. Valentin says:

    Hi Justin! A false breakout could occur no matter the breakout candle close properly, before reach the next support or resistance area? Do you never try a channel breakout? and why… Thanks.

    • Hi Juan,

      You want to wait for a close outside of the level to confirm the breakout. I do occasionally trade channel breakouts, but for this lesson I wanted to focus on wedges as they’ve become one of my favorite patterns to trade. Perhaps I’ll write another lesson focusing on channel breakouts.

      • Peter says:

        I agree may we talk in email please

  • james says:

    hi , just a newbie, may I ask how could one possible enter a trade when the 4HR candle had not been completed yet as in your USDJPY (13 pips SL, 50 pips take profits). I would assume we need to wait for price to breakout & pullback to resistance, where I can’t see how it can possibly happen, would greatly appreciate if you could teach .

    • Hi James,

      Thanks for your question. The last example in this lesson was the exception to the rule in terms of giving a retest of the level. In fact we didn’t even see any sideways price action to indicate that a retest wasn’t likely.

      I actually traded this breakout and entered as soon as the 4 hour bar closed. The momentum here was tremendous and this pair had been consolidating for 180 days. Any time you get that length of consolidation, the ensuing breakout is often quite volatile. This is partly due to the fact that there were a lot of stops above resistance that were being taken out.

      It takes some time to get a feel for the more discretionary aspects of trading such as this, but with some practice it’s very doable. 🙂

      I hope that helps.

    • james says:

      thank you sir

  • Namaste JN 🙂
    very well explained strategy with stop and take profit levels…
    one question is…………….. u mean that longer the time period the price consolidates,,, more will be volatility ….
    and when u entered long in last USD/JPY chart, u mean that take blind entry on close above trendline resistance in daily time frame because the price respected this level on daily time frame only…. am I right???

  • Srinivas Kumar says:

    awesomely beautiful sir-thanks a lot

  • Sage Akporherhe says:

    Thanks for the post Mr. Justin, Just one question though can I use a measured objective I.e. by projecting the top to bottom of the swings that started the consolidation and projecting the number of pips after the breakout for profit target too or should I only use the beginning swing (depending on the breakout direction) of the consolidation to take profit or is that kind of measured objective only used on the daily chart.

    • Hi Sage,

      You’re welcome. It’s important to use a distance that also lines up with a key level in the market. Your profit target should never be left to a measured objective without first checking to see how that objective lines up with the levels the market has deemed to be important.

  • charles says:

    Thanks i always trade support and resistorsi.problem is when to know the price have reached up or down with one candle,is their away we can set alarm.to notify us.

    • Charles, most trading platforms have this ability. A quick search online should yield the results you’re looking for.

  • Adewale says:

    Thank you so much for this eye opener. Please, i will appreciate a lesson on Equidistant Channel that How th draw and use it.GOD bless and thank you

  • Antonio says:

    Hi Justin,

    Thank you very much for all the information on your website.

    A few questions about the entry in the GBPNZD 4 hour chart:

    Could you let us know why you placed the short entry were you did?
    Did you mean to place it below the candle that broke the wedge?
    Was it placed after the formation of the only bullish candle in the small lateral channel?
    Could it have been placed below the small lateral channel?

    KR,

    Antonio

    • Antonio, see three charts up from the bottom.

      “The retest that we look for as part of this Forex breakout strategy typically comes within the next few candles. So if the market begins to move sideways for more than three or four periods, there’s a good chance that the market won’t give a full retest.”

  • Pawel says:

    I do not understand your entry in first USDJPY H4 short expmple. Did you enter at market or sell limit at touch of the broken support line ? I would image entry after next (black, engulfing) candle – where we retest comfirmation (rejection of the line)

    • You could have used either, but I always wait for a retest of the broken level before considering an entry.

  • Eddie says:

    I’ve tried so many strategies , this one takes the trophy. I’ve been making profits everyday with this!

  • Ang says:

    Hi justin, thanks for your explanation…i want to know, at last example in usd jpy, you enter buy position without wait the retest..can i get more explanation for this setup?thanks

    • You wouldn’t want to buy in that case. It’s a sell order on a retest of the level as new resistance.

  • Jenny says:

    Hi Justin. Thanks a lot for sharing your knowledge. I’ve been following your lessons and all i can say is i have learned a lot. I’ve been practicing on a demo to learn the skills in trading forex. I believe this will pay off for the rest of my life. Please can you recommend a Broker to me that you’ve been using for years that you never had any problems regarding withdrawals or any fraud issues? coz i’m planning to go live. I just need a good and trusted broker tested by someone reliable too. A response from you will be highly appreciated. Thank you

  • Jacob says:

    Hi -great lesson! Can this work on smaller time frames – say 15 mins?

    • themoney says:

      Work on every time frame,personally i use top analysis,then move to 5m

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  • EXCELLENT LEARNING.PEOPLE CHARGE A LOT TO TEACH THIS.YOU ARE DOING GREAT SERVICE TO THE TRADING COMMUNITY.ALTHOUGH I DONT TRADE FOREX BUT THE ARTICLES ARE OF HELP TO ME IN STOCK TRADING.

  • I would to thank you for simple & consise illustrations for your breakout strategy, thanks & regards, Mbuyiseni

  • Benny says:

    Hi Mr Justin
    Thank you very much for the lessons , I’m a beginner and I’m learning a lot. My question is , does this strategy on works in 4hours and daily charts only? Thank you very much

  • Robert says:

    I really enjoyed reading your strategy and I love how you made it so easy to understand on all points.
    I only have one question, would it not be better to use a trailing stop as opposed to a hard SL/TP to get the full potential of the trades?
    You insight and experience would be greatly appreciated.

    Robert

  • Ibrahim huneidi says:

    Hi
    Is it possible to automate or code
    This strategy

  • Hello,I read your new stuff named “The Forex Breakout Strategy You Need to Master | Daily Price Action” regularly.Your writing style is awesome, keep it up! And you can look our website about free anonymous proxies.

  • Hamiz says:

    Hello

    What does the longer the market consolidates mean? And more volatile the resulting breakout means?

  • Khyber Khan says:

    It’s very knowledgeable article

  • Khyber Khan says:

    Well explained ,I hav a question that why 1hr 4hr and daily chart are show trend different.
    Why they are different and not show the market position collectively

  • Liew Pei Geng says:

    Do you have any paid course?

  • Vernon Paul says:

    Hi Justin
    Do these breakout normally breakout in the direction of the trend?

  • mlungelwa says:

    Hi thanks this is great iv ever had about

  • Mpho Shisa lezinto says:

    Hi break outs occur at anytime and you showed us how to enter the market now there is a thing called fakeouts how are we supposed to know for sure if its a breakout or a fakeout?

  • Michael says:

    clearly explained and very usefull. thank you

  • John says:

    Hi Justin! I find your trading style interesting and would like your advice: I an attempt to narrow things down, which swing pattern/strategy would you say has the highest R ratio and win ratio? John Westberg

  • Gideon says:

    please how do you draw those lines that represents support and resistance indicator am not saying how to spot out support and resistance but those lines how do I draw them from my MT4.Thanka

  • Kai says:

    My Hong Kong girl friend will master this soon.

  • Sbusiso says:

    woooow looking no more indicators on my charts again. thank you so much.

  • mukhtar says:

    I,d love for you from my heart due to excellent lecture about break out stratgy

  • abel says:

    thank you very much for the information.
    -I can now understand everything that i have been searching for about breakouts stratergies.

  • Daniel says:

    I just learned valuable way of trading my strategy

  • Nikos says:

    I liked your article, from my point of view, I don’t trust breaks that formed after 16.00h GMT due to the lower volatility.

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