For example, let’s assume that euro-dollar traded in a channel last week, oscillating between $1.3650 and $1.3710. A channel is formed by two parallel trend lines that connect the highs and lows of a price pattern. In this case, the low of the range, $1.3650, is support and the high of the range, $1.3710, is resistance. Once the support and resistance levels are established, you can buy the market on a break above $1.3710 or sell the market on a break of $1.3650.
The next step is the placement of a stop loss order. Breakouts often fail – this is known as a false breakout. False breakouts can create whipsaw price action and rapid reversal in price direction. Placing a tight stop – close to the level of the breakout – will help avoid a substantial trading loss should the breakout prove false. Using a breakout strategy for placement of stops is an excellent money management tool and helps preserve capital until a sustainable trend emerges.
Once the trend starts, there are a number of technical tools that can be used to set a profit target and exit point for the trade. The most common tool to stay with the trend is to use a moving average that helps identify the strength of the trend along with the placement of a trailing stop to protect a percentage of profit.