Breakout in forex trading
Have you ever traded using breakout in Forex? Wait, you don’t know what is breakout. Don’t worry; in this article, we will learn about breakouts, their importance, types, and how to trade using this strategy.
What is breakout?
Breakout is the situation when the price of the asset breaks below or above the critical support and resistance level. The breakout strategy is widely used in Forex, cryptocurrencies, stocks, and the comex market.
Understanding breakout is vital as it indicates potential or strong price movements. It helps traders in positing their trades and deciding the entry and exit points.
Breakouts also work as trading signals. A breakout in the upper direction signals traders
to go long, while a breakout in the downward direction signals trade to take a short position.
Types of Breakout in Forex
Breakout is divided into two major types, including continuation and reversal breakouts. Let us understand the Types of Breakout in Forex with features.
As the name suggests, it is when a breakout or initial trend is continued. Generally, it occurs when the buying and selling activities pause due to indecision or consolidation in the market.
When the price of a currency pair moves in a narrow range without any clear indication of an upward or downward direction, it is called consolidation. During consolidation, traders feel that the price will continue in the initial trend, resulting in a continuation breakout.
A quick glance
Breakout is the situation when the price of the asset breaks below or above the critical support and resistance level.
A breakout in the upper direction signals traders to go long, while a breakout in the downward direction signals traders to sell the asset.
- Continuation Breakouts
- Reversal Breakouts
Fakeout occurs when the price breaks the key support and resistance levels; however, instead of moving in the existing direction, it starts moving in the opposite direction.
- Technical Indicators
In contrast to the continuation breakout, the reversal breakout suggests the reversal of the initial trends. Generally, during consolidation, when traders feel that the trend is now exhausted and push the price in the opposite direction, it’s called a reversal breakout.
How to trade breakout in Forex
Many traders stick to the rules and trade breakout without even considering market conditions or confirming. Here is a guide for using breakout strategies effectively.
Support & Resistance Determination:
The whole concept of breakout trading is based on support and resistance. So, the first step is to identify these crucial points using different indicators or breakout patterns.
Also, keep in mind that support and resistance are not the same for all traders. It is because of the use of different indicators and strategies. So, breakout levels can be subjective.
Chart Patterns & Trend Lines:
Many traders find difficulty in spotting breakouts, so you can use chart patterns to identify them. There are many patterns like head and shoulders, Triple top and bottom, double top and bottom, triangles, wedges, flags, etc.
These candlestick patterns enable traders to identify strong breakouts. You can also draw trend lines to determine breakouts on the chart. You just have to draw a line connecting the highs or lows of candles representing the prevailing trends.
The more highs or lows touching the line, the stronger the trend and vice versa. You can also determine the breakouts through trend channels. It is quite similar to the trend; the only difference is you have to draw another line on the opposite side of the trend line.
Trading Breakout In Forex:
While the approach of every trader is different, one can make buy and sell decisions using breakout. When the price breaks the resistance level, it is expected to rise further, triggering bullish sentiments.
Meanwhile, when the price breaks the support level, it is expected to fall further, triggering bearish sentiments in the market. However, there is no hard and fast rule in trading, and it may not be the case always.
Trading is 90% of waiting and 10% of execution. Especially when trading breakouts, waiting for a decisive and clear breakout is a must.
Also, before placing the trade, a trader should confirm the breakout using different tools. You can also verify the breakout by analyzing the volume. Generally, trading activities increase after a strong breakout.
Breakout vs Fakeout
The best way to identify fakeout is to keep your eye on the volume or the number of trade activities in the market. Generally, when the volume is low, the breakout tends to be fake. It indicates that traders’ sentiments are not convinced of the effectiveness of the breakout.
The fear of missing out makes traders place the trade as soon as the breakout occurs. However, that is not the right approach, and it may result in big losses. So, wait for some time to study price trends and market sentiments, and do not trade the first breakout.