With breakout trades, the goal is to enter the market right when the price makes a breakout and then continue to ride the trade until volatility dies down.
Breakouts are significant because they indicate a change in the supply and demand of the currency pair you are trading.
You’ll notice that unlike trading stocks or futures, there is no way for you to see the volume of trades made in the forex. Because of this, we need to rely on volatility.
Volatility measures the overall price fluctuations over a certain time and this information can be used to detect potential breakouts.
Chart Indicators to Measure Volatility
There are a few indicators that can help you gauge a pair’s current volatility.
Using these indicators can help you tremendously when looking for breakout opportunities.
- Moving Averages
- Bollinger Bands
- Average True Range (ATR)
Types of Breakouts
There are two types of breakouts:
How to Spot Breakouts
To spot breakouts, you can look at:
- Chart Patterns
- Trend lines
How to Measure Breakout Strength
You can measure the strength of a breakout using the following:
- Moving Average Convergence/Divergence (MACD)
Finally, breakouts usually work best and FOR REAL with some kind of economic event or news catalyst.
Always be sure to check the forex calendar and news before figuring out whether or not a breakout trade is the right play for the situation.
Institutional traders like to fade breakouts. So we must like to fade breakouts also.
Are you going to follow the crowd, or are you going to follow the money?
Think, act, eat, sleep, and watch the same movies as these guys do. If we can trade in the same way the institutional players do, success is just a glimpse away.
Fading breakouts simply means trading in the opposite direction as the breakout.
You would fade a breakout if you believe that a breakout from a support or resistance level is false and unable to keep moving in the same direction.
In cases in which the support or resistance level broken is significant, fading breakouts may prove to be smarter than trading the breakout.
Potential fake outs are usually found at support and resistance levels created through trend lines, chart patterns, or previous daily highs or lows.
The best results tend to occur in a range-bound market. However, you cannot ignore market sentiment, common sense, and other types of market analysis.
Financial markets spend a lot time bouncing back and forth between a range of prices and do not deviate much from these highs and lows.
Finally, the odds of a fake out are higher when there is no major economic event or news catalyst to shift forex traders’ sentiment in the direction of the break.