EUR/USD: Trade With Breakout Entries

Market ranges occur when a currency pair lacks a specific directional trend. This can often happen as the market awaits specific direction from a news event like todays FOMC release. Instead of being deterred by sideways pricing, short term Forex traders can take advantage of them by identifying the range define and preparing to trade the news using entry orders. Today we will review a trading plan for taking advantage of these scenarios.

The first step for trading a breakout of the range is to identify current levels of support and resistance. These levels should be easy to identify as price will trade flat in a range. Resistance will be found overhead by connecting a series of near identical highs, while support is below can be found by matching current lows in price action. Looking at the EURUSD chart below, current resistance can be found near 1.3415. Support is currently holding up price near 1.3385, creating a tight 30 pip trading range on the pair. These points will be the basis for our strategy, and should be clearly marked on our chart before progressing.
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Next, once support and resistance have been updated and a trading range identified, we can begin to prepare our trading strategy. Even though price is moving sideways at present, traders may look to take a directional bias when trading a breakout of the range. Currently price action has been headed towards higher highs, creating an uptrend on the EUR/USD. Knowing this, short term trend traders can look for entries to buy on higher highs.

In order to create a higher high, price will have to move through the resistance levels that we described above. If prices trade above the previous high at 1.3415, breakout traders will look to buy the EURUSD. This method can be used by placing an entry order above this value, or traders may even consider to manually entering into the market once the breakout has been confirmed with a candle closing above current resistance.
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When trading breakouts, it is always important to consider risk. In the event of a false breakout, traders can set stops underneath levels of current resistance. I recommend placing stops at half the value of the initial range. This way if you use a full extension of the range as a profit target, you will naturally develop a 1:2 Risk/Reward ratio.

--- By Walker England, Trading Instructor