What is a Forex breakout, you may ask? It is nothing but a price movement which happens through an identified level of resistance or support. This is generally followed by increased volatility and heavy volume. Traders will purchase the underlying asset once the price breaks above a particular level of resistance; they will also sell it when the breaks happen below the support level. Let’s know more about three important things about Forex breakouts.
Different types of Forex breakouts
There are two types of Forex breakouts in the market; continuation breakout and reversal breakouts. Breakouts are important to know about the supply and demand of the currency pair that one is trading. In fact, the moves can prove to be very beneficial for you. Often it is seen that after an extensive move to one particular direction, the market will take a breather; it means that the buyers and sellers stop to think about what they should do next. This period sees a range-bound movement which is known as consolidation. Now if the traders decide that the initial decision before the pause should be continued, the market continues to move to that direction, and the market experience a continuation breakout. In case of a reverse breakout, the first few steps are similar to continuation breakout; the traders pause, but post-consolidation they decide that the trend has exhausted, and it is best to reverse the direction.
Measuring the strength of breakouts
Once you know the types, it is time to figure out a way to measure the strength of Forex breakouts. MACD or Moving Average Convergence/Divergence is one of the best indicators to know the momentum or lack of momentum in the market. The best way to look at it is by looking at the histogram which shows the difference in fast and slow MACD line. If histogram gets bigger, then the momentum is strong; if it gets smaller, then the momentum becomes weak. RSI or Relative Strength Index is also one of the most effective ways to confirm reversal breakouts. Like MACD, it also helps to give a picture of divergences; by looking at the divergences it is easy to note the trend reversals.
Trading in breakouts
You must have volumes of data to make a good breakout trade, so if you are not having this data, it might prove to be problematic for online trading. For instance, if the price movement is relatively large within a short span of time, then you must know that market volatility is high. In case of a reverse situation, volatility is relatively low. In case of a volatile situation, you can be a little anxious or stressed out and often make bad decisions. Use the volatility to your advantage, and you will reap the benefits of breakouts.
Before you do trading during breakouts, it is important to know the market and also plan as per your acumen!