In any financial market, including forex, trading breakouts can often be a tricky ordeal. False breaks are a common occurrence that frustrate even the most dedicated forex traders.

One high-probability approach to entering into a breakout is to wait for a pullback/throwback to occur. Very often, momentum on a breakout will wane shortly after the break and retrace to re-test the point of break, resulting in a pullback/throwback move.

A throwback is simply a return to the point of breakout on an upward break. A pullback is a return to the point of breakdown on a downward break. If the breakout is true, price should hit and then bounce off the breakout price region, before surpassing the point at which momentum waned and price turned. This is illustrated on the accompanying diagram.

Many prudent breakout traders will wait for a pullback/throwback before getting in on a breakout move. Traders who do so may miss some potential trading opportunities, but that extra patience often pays off in higher probability breakout trades that have a greater likelihood of following through in the direction of the break.

As a side note, I will be speaking at the Forex & Options Expo in Las Vegas on August 3rd, 2009. The topic of the 2-hour workshop that I will be giving is entitled, “High Probability Breakout Trading in the Forex Market,” and it will feature effective professional techniques for trading forex breakout opportunities. Here is the link for more details: http://www.moneyshow.com/lvfx/WorkShopDetails.asp?wkspid=1C565A972C0E408C906EB11624490B12 . Hope to see everyone there in August!

- James Chen, CTA, CMT

* I will be key speaker at FXstreet.com’s International Traders Conference in Barcelona, Spain in October 2009 - for more information, please go to: www.traders-conference.com .

* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.

* Follow my intraday forex updates on Twitter: http://twitter.com/JamesChenFX