While there are several trading approaches that can be used to profit from currency trading, Box Breakout strategies remain one of the most popular. There attraction lies in the simplicity that they bring to trading as a well as the acknowledged potential to generate high profits. This approach to trading has long been used by traders for these very reasons. It is suited to both experienced traders as well as new traders who are looking for a reliable means of making their first profits from Forex trading.
One of the first rules of trading is that you should be able to understand the mechanics of your trading system. This is not only vital in terms understanding the logic of what the system is trying to achieve but will also able you to implement the strategy correctly. Complicated systems may offer you the chance to make profits, but if you are unable to execute them correctly then you will soon see any profits slip away.
The Box Breakout makes use of an easy to understand concept. The box that is alluded to in the strategy name is formed by upper and lower boundaries in the market with the sides of the box being formed from the start and finish time of the period of analysis.
As the second part of the strategy name suggests, what is looked for is a breakout from this range in either direction to signal a trade entry. Once the market moves beyond the ‘box’ and the move is confirmed, the expectation is that momentum will build as the market moves beyond the prior identified range. A stop level is placed usually either beyond the lower level of the box or below the level of the break.
Trading strategies based upon Box Trading are common and will usually be traded at set times of day. They work best at times of high volatility when the market is most likely to break a prior range. Typically the opening of a market session is used to trade these breakouts as the higher level of volatility at these times can see strong momentum build following the break. This allows not only offers the potential to back strong market moves but also provides a defined time for trading.
A good illustration of breakout trading is the opening of the London Forex markets. As the busiest time in the financial trading day strong breaks are often seen following the relative calm of the prior Asian session. While breakouts can occur on many currency pairs at this time of day it is the European based currencies such as the British Pound, Euro and Swiss Franc that will most commonly exhibit the strongest moves.
The key to maximizing your trading profits from this strategy is to wait for a confirmed move before entering the market. ‘False’ breakouts can often occur which can see the market suddenly reverse from its initial break. Therefore it is vital that any strategy you use has rules in place that help prevent the occurrence of false breaks or instead provides you with a strategy to profit from these moves as well.