Breakout Trading

When the currency price moves beyond the period of consolidation or range trading, a breakout typically occurs. Massive profits are what breakout trading can provide you. Who doesn’t want to reap massive profits from a big price move in a short time?Even though breakouts are known to be technically unstable, there are times when trading the breakout can be very profitable. When the price moves above or below a support or resistance level whether temporarily or permanently, a breakout occurs.You will have to take into account many market factors including both the technical and the fundamental analysis in order to trade breakouts with a higher probability of success. Both stocks and futures are traded on a centralized exchange. At the end of the day the traders can find out the volume of each security that had been traded during the day. The volume information is easily available for stocks and futures. Information about volume is critical to trading the breakout. This data cannot be collected due to the decentralized nature of the currency markets. Volume data is not available for currency markets due to its Over the Counter nature. Lack of forex volume data is a huge disadvantage to forex traders. Volume reveals where the market is positioned or positioning.Breakout signals a change in the underlying supply and demand conditions possibly triggered by a change in market sentiments. When the price attempts a breakout of a significant support or resistance level, this change is caused by some new markets fundamentals. Successful breakouts are generally accompanied by a rise in volume. Volume is a very important criterion for any breakout trading strategy.Price breakouts can be of two types: 1) Continuation Breakouts and 2) Reversal Breakouts. Successful breakouts must be accompanied with a strong surge of momentum in the direction of the breakout in order to be sustainable. Poor momentum will generally lead to the fizzling out of the breakout and continuation of the existing trend.Continuation Breakout: The price action climbs higher in continuation of an uptrend or falls further lower in a downtrend in a continuation breakout. The breakout occurs after a period of consolidation. The buyers and sellers of the currency pair try to regroup and think about the next price move. Currency prices break out of an established price level to again resume the underlying trend.Reversal Breakout: A breakout my lead to a trend reversal and the beginning of a new trend in the opposite direction! Reversal breakout means a new trend in the opposite direction caused by new market fundamentals. The prices may break the support or resistance but then retreat back into the previous price zone. A false breakout can always occur. There are many times when the price action does not move in a straightforward direction in the markets.If you are a breakout trader and you have placed your stop just above or below the resistance or support levels, a false breakout will stop out most of the breakout traders! The worst kind of a breakout is the whipsaw type.When prices move out of a price range, then back into the price range and then breaks out of the level again, stopping both breakout traders and faders at least once, whipsaw takes place. When there is a lack of momentum or the breakout is small and weak, a whipsaw breakout usually occurs.Reasonably placed stops can help preserve your capital when the price breakout does not go your way. Some times the price action is so choppy that it is better to stay out of the market. Breakouts all carry some risk of failure.Successful trading of a reversal breakout obviously means massive profits in the shortest possible time. The important thing is to identify a breakout with a false breakout. How do you know if a breakout is going to reverse the current trend?There are some chart patterns that can help in identifying a likely breakout. You should look out for these reversal chart patterns that tend to serve as harbingers of a trend change. There is a high chance that a reversal may be in the works if you spot these chart formations in daily or weekly charts. Examples of such patterns include head & shoulder, double top, triple top, double bottom, triple bottom etc.Momentum indicators also known as oscillators are leading indicators. You can also make use of the momentum indicators to tell you if a trend is nearing its end in addition to looking for these chart patterns. They help in identifying a trend reversal before time.MACD comprises of 3 Exponential Moving Averages (EMA). The MACD line is the difference between the 12 period Exponential Moving Average and 26 periods Exponential Moving Average. Usually a signal line consisting of 9 periods Exponential Moving Average is plotted together with the MACD line. Moving Average Convergence Divergence (MACD) is one of the simplest, yet most dependable indicators for a trader