Hello and welcome to another edition of the bulls vs the bears. A while back I did a post on How To Cash In On Trading Breakouts. . This week we are going to learn how to trade breakouts with ease and we we will be looking at three breakout patterns
Knowing the type of breakout you are dealing with is absolutely crucial if you want to succeed as a forex trader. Why am I saying so? Because it will help you understand the bigger picture as to to the happenings on the forex market. Breakouts are also crucial in the forex market’s scheme of things in that they help indicate the change in preference as to the currency pair you are trading. In other words they indicate the change in supply and demand. This pendulum swing those huge moves we so dearly love. And they create huge opportunities for racking up profits.
So the first breakout pattern we are going to touch on is:
Continuation Breakouts
Continuation breakouts are trade setups that shows price action skewing sideways. Here buyers and sellers take a breather to contemplate their next cause of action after initiating huge moves on the market Here, prices drop with the bears selling short to take their profits. Once they recover their bearings, they resume selling again. Consequently, it causes a period of consolidation which result in the skewing patterns you see on the charts. Let’s take a look at an illustration of consolidation before the breakout using the USD/JPY pair.
Ladies and gentlemen, here is an illustration of consolidation. You have sellers taking a break after closing out their original trading positions. You see the sideways formation that I explained above? Now let’s see what happens when the bears decide to push price in the same direction
This ladies, and gentlemen is the continuation breakout that I explained earlier, Basically the bears have decided to continue with the initial trend that they initiated earlier. In so doing they are going to continue selling til they drop.
Next up is:
Reversal Breakouts
Reversal breakouts occur where traders run out of steam at the end of the trend. So they decide to do an about turn by pushing the price in the opposite direction. And just like its continuation counterpart, the traders take a long pause . Now let’s take a look at the reversal breakout in action
Here we see a consolidation period as a result of the traders taking a breather.However,realizing that the initial downtrend was running out of gas, traders do an about turn and decide to breakout and head for the hills (as indicated by the green arrow). You can only imagine the profits they cold accumulate on their way up.
Last but not least is:
False BreakOuts
Now false breaks are very dangerous customers. False breaks take shape when price breaks through a certain level(e.g. support or resistance) but discontinues its advance in that same direction. And when that happens you may find your initial trading position swallowed by a blood sucking consolidation. Let’s a see a false breakout in action
The yellow circles in the upper and lower consolidation areas represent the false breaks I referred to earlier.Instead of continuing in the same upward direction price does a complete pump fake and heads downward. What resembles a price increase is immediately followed by a price crash straight into a consolidation zone. Now someone is probably asking
How Do I Enter A Breakout?
Wait for price to retrace back to its original breakout level and see whether it creates a new high or low. Of course it depends on the direction you are trading in.
Also do not pounce on the first breakout that catches your eye. In so doing you deny yourself an awesome chance of racking up huge profits.The downside to keeping watch is that you may miss out on profitable forex trades as price accelerates at the speed of light. Trust me, I’m talking from experience.
That’s a wrap for “How To Trade Breakouts with Ease. ” It’s possible to profit from trade breakouts if you know which breakout you are trading. Think of breakouts as indicators of the grand scheme of things on the forex market. That they also help reveal the change in currency preference in terms of the currency being trades.
Til next time take care
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