Breakout trading is a timeless way to trade because - all the big trends start from breakouts and as the trend evolves, the market continually will make new highs in a bullish trend. Of course not every breakout will be successful, you need to be selective in the ones you choose and here, we will look at how to make your breakout trading strategy more effective.

Here are some general rules, you can use in your breakout trading system to help you make it more effective:

- The More Tests the Better the Odds

You should always trade breaks of strong levels of resistance and while the minimum number of tests is two look to trade 4- 6 as a minimum or even more.

- The Wider the Tests are in Terms of Time the Better

Not only should there be several tests the wider they are spaced apart in terms of time the better the odds, the break will be sustained once the break occurs. For example 7 tests within 1 month is generally not as good, as 6 tests with two of the tests being at least a few weeks or even a few months apart in terms of duration. This shows that the supply and demand situation is changing over the long term which is a much powerful trading signal, than if they change within a short period of time.

- If the Crowd Doesn't Expect it Trade it

In terms of breakouts from a period of congestion, it's best to trade breaks, which the majority of people can't see a reason for the break happening. If this scenario occurs its probably going to be a good high odds break. If most people see a break coming and its heavily featured in the media, it will be less likely the breakout will be sustained.

Bruce Kovner one of the true greats of currency trading explains this concept in the classic investment book “Market Wizards” where he refers to the Heisenberg principle in physics which says:

“if something is closely observed, the odds are it is going to be altered in the process” If a market breaks when know one expects it the odds are therefore far higher than when they do.

So in conclusion - if a breakout feels uncomfortable to do and the vast majority of people think it shouldn't be happening, you should be trading it!

- Look for Breakouts in Cross Rates

Don't just look for breakouts in the major currency pairs – the cross rates can very often provide the best opportunities and the reason for this is - there is simply less speculative interest in the crosses and as Bruce Kovner says again in his interview in the book Market Wizards: “The General Rule is - “The Less Observed, the better the trade”

- Use Momentum Indicators to Confirm the Velocity of Price

The velocity of price change should be accelerating as the break occurs, as this shows fresh buying is occurring or stops are being hit, as the resistance level is taken out. You can use some momentum indicators to check this out and good ones to use are the RSI, the Stochastic and the MACD.

Final Words

If you use a breakout trading strategy or are are considering using one, the above tips will help you hit high odds trading signals and make bigger profits. Breakout trading is a timeless way to make money and always will be as long as currency markets trend and that will never change in a free market economy.