Talking Points
- Trading a breakout strategy affords many benefits when day trading.
- Order placement can be aided through the use of Camarilla Pivots.
- Learn to place stops and limits using support and resistance.
Trading intraday breakouts continues to be a favorite methodology for trading news events such as todays FOMC (Federal Open Market Committee) rate decision. While rate expectations are forecasted to remain the same, it can increase the possibility of a price breakout on pairs such as the EUR/USD later this afternoon. Breakout traders will enjoy the advantages of having clear points of entry through the use of support and resistance, all while having the ability to trade the news with either market or entry orders.
Sound good? Today, we will cover a three-step process to day trading the EUR/USD using pivot points.
EUR/USD: 30 Minute With Pivots" width="623" height="383">
Created using FXCM’s Marketscope 2.0 charts
Apply Pivot Points
While this first step may seem like a no brainer, it is important to add pivots to the graph so we can trade them! Camarilla pivots used in the example above, are available to traders through FXCMs Marketscope 2.0 charts. Camarilla pivots are designed to show key levels of support and resistance which can be perfect for identifying a potential Forex breakout! When using Camarilla pivots for a breakout, traders should keep an eye on the S4 (support) and R4 (resistance lines). These areas are identified as market extremes and in the event that momentum pushes price through either of these levels, traders will want a plan of action to trade their favorite pairs.
Place Your Entry Orders
Once key intraday levels of support and resistance are found, trading a breakout is a fairly straightforward process. Traders will look for a strong continuation to the upside in the event price moves through resistance, prompting new Buy positions. Conversely, if price cracks S4 support traders will look to sell continued downward price momentum. It should be noted that traders can execute a breakout strategy using entry orders, or by placing a market order. Market order traders have the luxury of being in front of the computer. This allows traders to enter immediately, or wait for a candle close for confirmation if preferred. Entry orders allow traders to set orders and walk away from their computer. If either S4 or R4 is broken, they will be ready to enter into the market at the best prevailing price. If you choose to trade with entry orders, consider an OCO order. This way, an entry to buy can be placed above the R4 pivot, and an entry to sell below S4.
Manage Risk And Take Profit
As you can see breakouts can be an easy and effective way to approach short term trading the Forex market. However, it is important to note that false breakouts can and will occur. Traders should always prepare for price moving against their entry through the use of a stop order. The use of Camarilla pivots can also make the process of risk management easier.
In the example below, we have set up a potential breakout on the EUR/USD above R4 resistance. A stop has been placed at R3, for a 20 pip stop loss. From here, traders can extrapolate a positive risk reward ratio of their choosing. Looking to gain more profit in a winning trade, limits are to be set at least 40 pips away from the breakout entry. This would setup a preferred 1:2 Risk/Reward ratio.
EUR/USD: Pivot Entry Points" width="623" height="353">
Conclusion
Using a day trading methodology to trade breakouts can be made easier through the application of Camarilla Pivots. Remember that this strategy is broken down into three essential components and can be useful when the market approaches a potentially volatile economic event.
Following this three-step strategy will allow for traders to identify and execute an easy to follow breakout strategy. The next part of the equation is to then determine your trade size. For more on that, follow this three-step guide to determine your trade size.
-- By Walker England, Trading Instructor.