UNDERSTANDING BREAKOUTS
Understanding breakout trading with continuation and reversal breakouts
We look at continuation and reversal breakouts as well as fake outs. It’s always a good idea to refresh your knowledge with some of the basic theories for trading in the Forex market.
Breakouts are, arguably, the most important events in Forex trading. They can not only tell you what is happening on with supply and demand, but also give insight into how traders feel about their investments for long-term or short-term profits.
There are two primary forms of breakouts: continuation breakouts and reversal breakouts, which frequently interact depending on the situation at present.
When you understand the different types of breakouts, you’ll be able to make sense of things that may be confusing to new Forex traders. Beginners don’t usually understand why prices change suddenly and incongruently with previous trends seen over days, weeks, or months; if it’s an upward continuation, the price must be higher than before.
For Forex traders, a change in sentiment may create a lot of excitement and opportunities to earn some quick pips and participate in overall trends.
Again, as with most technical tools, we must look left to see how the price has behaved before in order to determine the targets or breakout lengths. With added confluences, using other tools can increase the structure and clarity of your targets. The more details and confluences, the better!
Continuation Breakouts
It can be difficult to discern if the market is going to make another move during periods of range-bound movement known as consolidation. This phenomenon occurs when buyers and sellers analyse the moment and how to act. So after a long rally in one direction, you might expect some breathing room, or continuation breakouts, across other parts of the stock’s chart. Not simply an immediate reversal breakout that crashes as if nothing had happened!
Forex traders are constantly in search for the next big trend. If traders see an initial trend and it continues in that direction, they will continue to push prices as a “continuation” of what first appeared to be the best decision. This is referred to as a “continuation breakout”!
Reversal Breakouts
The trend is the sole difference between continuation and reversal breakouts. A long, steady uptrend precedes a reversal break, which slows as it approaches its peak.
A typical pattern would be an extended period where prices have grown in a more gradual climb or even gone sideways before they spike up suddenly, which can indicate strength on both ends of the trade as well as potential exhaustion among buyers who are less likely to continue buying aggressively after such prolonged periods without much movement.
False Breakouts
False breakouts occur when price breaks past specific levels but does not continue to move in the same direction. Instead, you could observe a short price spike followed by a return to the trading range.
False breakouts may be deceptive, leading traders who were on the lookout for an entrance to quickly exit the trade with no profit.
How do you enter on a breakout? In this situation, you should wait for the price to retrace back to its original level before determining whether it will bounce up or down. If you’re trading upwards, wait for an uptrend to form before entering; if you’re trading downwards, be sure your trade will bounce shortly before entering (and know what direction the trend is moving in).
To make the most out of your trades, wait to see if a breakout will continue in the same direction before entering. The drawback is that sometimes prices move quickly without hesitation, so traders might miss out on some opportunities by waiting too long.
