Problems with Forex Breakout Strategies

Breakout strategies are very popular with many traders because price must develop a large amount of energy to escape from a tight trading consolidation pattern. If it is able to achieve this goal, then the resultant momentum can be capable of producing a movement of significant size.
In addition, entry points for new positions are easy to define using this technique. This is because prior to the breakout, price would have been trading a tight range defined by a ceiling or resistance level and a floor or support level. The trader just needs to wait for the market to penetrate either of these extreme levels before entering a trade in the direction of the breakout. However, the main problem that traders face using this strategy is that a breakout could transform itself into a fakeout. If this were to happen, they could be stopped-out resulting in losses. A breakout transforms into a fakeout when the price action retracts back into its old consolidation box. In addition, price could even proceed to move further in the opposite direction to the original breakout.
Substantial studies have been made to try and determine why exactly fakeouts occur. As you can image, if a clear reason could be determined, then this information would be extremely valuable in increasing the profitability of breakout trading. Some theories attribute the creation of fakeouts to technical analysis failing at the point of the breakout.
However, this is bound to happen sometimes because Forex Trading is not a predictive subject. The best that any trader can hope to achieve is to determine the probabilities that such an action will occur. As such, the generation of fakeouts for a percentage of the time supports this viewpoint of Forex Trading well.
Consequently, you certainly need to use a good money management strategy to protect your balance as well as improving your chances of overall success when you attempt breakout trading. Fundamentally, this means you should never use more than 2.5% of your free balance on any individual trade of this type. You may think that in doing so that you will take a long time to acquire any real profits. However, you would be wrong because the returns from a successive number of wins, even at 2.5%, increase your balance exponentially. This effect is known as profit compounding.