Breakthrough Strategy

Breakthrough strategy refers to a trading strategy that takes advantage of the opportunity for prices to break through from a certain key level or technical indicator during market price fluctuations to enter the market with the trend. The core idea of the breakthrough strategy is that when the price breaks through an important level or indicator, there will often be stronger market power to push the price to continue to develop in the direction of the breakthrough, forming a new trend or continuing the original trend.

Different Scenarios of Breakthrough Strategies

• A horizontal breakout is when price breaks through an important support or resistance level.

• Trend line and trend track breakouts, that is, entering the market after the price breaks through the trend line or trend track in the opposite direction.

• A moving average breakout occurs when price crosses above or below the moving average.

• A chart pattern breakout means entering the market after the price breaks through the key level of the chart pattern formed.

How to Use Breakout Strategies in Forex Trading?

1. Identify breakout points, which are important levels or indicators at which price may undergo a directional change.

2. Observe price action to determine whether there are signs of a breakout, such as volume, volatility, momentum, etc.

3. Confirm the validity of breakthroughs and avoid the traps of false breakthroughs, such as backtests, confirmation lines, filters, etc.

4. Choose a suitable entry point, and decide whether to chase the rise and kill the fall or wait for a pullback based on the strength and magnitude of the breakthrough.

5. Set reasonable stop-loss and take-profit points to control losses and protect profits based on the risk-return ratio and market conditions. 

Breakthrough Strategy Examples

The EUR/USD currency pair fluctuates within an ascending channel from October 2022 to April 2023. The upper rail and lower rail of the ascending channel are the resistance and support levels of the price respectively, which can be used as breakthrough points.

On April 21, 2023, the closing price of EUR/USD crossed the upper track of the ascending channel, and trading volume increased, showing signs of a breakthrough.

On April 22, 2023, EUR/USD continued to rise, and the closing price was higher than the confirmation line (i.e., the upper track of the upward channel plus 0.5%), confirming the validity of the breakthrough.

On April 23, 2023, EUR/USD made a slight correction after the opening, but did not fall below the confirmation line. It can be used as an entry point to buy EUR/USD. According to the principle of a risk-reward ratio of 3:1, the stop-loss point can be set 0.5% below the confirmation line, which is 1.2150; the stop-profit point can be set 1.5% above the entry point, which is 1.2340. April 26, 2023, Euro/ The US dollar hits the take-profit point and profits are realized.

Pros and Cons of Breakthrough Strategy

Pros

• You can seize the change or continuation of market trends and increase the probability of profit.

• It can avoid frequent transactions in volatile markets and reduce transaction costs and risks.

• According to the strength and amplitude of the breakthrough, reasonable stop loss and take profit can be set to improve the risk-reward ratio.

Cons

• You may encounter false breakthroughs, resulting in transaction failure or loss.

• Some trading opportunities may be missed because the market may not necessarily make the ideal breakthrough.

• It requires strong analytical skills and judgment to identify true and false breakthroughs and breakthrough directions.