Break Out Trading Breakouts

 

Today we’re going to break out trading breakouts. It’s my fancy way of saying we are going to learn how to trade breakouts.  No, we’re not talking about the major zit breakout you experienced when you were a teenager..  No this breakout happens around psychological levels such as support levels, pivot points, e.t.c.Breakouts are great opportunities  to make profits. They are a result of the bulls pushing the prices up and heading for  the hills. Breakouts are fun to trade because you get to pick up a ton of cash along the trail if you recognize the opportunities quickly enough.

So we are going to do what we always do. Find how breakouts occur, the types  of breakouts,  and how to trade them.

How Do Breakouts Occur?

Well,breakouts ‘break out’ (For want of a better word) of a consolidation or trading range. Once the heavy players have taken a breather , they continue with their journey. Breakouts also occur when a specific level  such as support and  resistance levels, pivot points,e.t.c.The main objective behind breakout  trades is to make your entry just when the price breaks out. You then enjoy the ride  until volatility  fades away.

Speaking of volatility

Think Volatility Not Volume

Why should you think volatility and not volume? Because it’s difficult having a graphic illustration of the volume of  trades. In view of  this deficiency, it becomes even  more important to rely on solid risk management  in order to take advantage of  a price breakout. If price movement increases within a short space of time, then volatility is considered on the high side. However, if   there is little price movement within that same short space of time then volatility is considered on the low side.

Sure, it’s tempting to move into the market when ti’s moving as fast as a speed train. However,you risk spiking your anxiety levels,resulting in poor decision making resulting in heavy losses from impulsive trading. In as much as high volatility attracts forex traders like a magnet, it is this same volatility that  kills of  al lot of forex traders of the forex market. So what’s the moral  of the lesson? Use volatility to your advantage.Instead of following the herd and lumping head on into the market, it makes perfect sense to scope for currency pairs with low volatility. This way you will be in a position to take advantage of breakouts and sky high volatility.

And while we’re still on the subject of Volatility

How Do We Measure Volatility?

You can use the following indicators to measure volatility. They come highly recommended . First:

Moving Averages

Moving averages are probably the most popular indicator used by forex traders. It may look simple, but  boy does it provide crucial data for as far as making trading decisions are concerned. In simple language, moving averages measure the average movement of the forex market over a period of time, wherever you want that time frame to be located.

Use moving averages to measure price volatility.

As you can see, the blue line represents the numerous averages set to measure specific periods over a period of time. If you want to refresh your knowledge of moving averages, read up on We Are Moving Averages Part One and  We Are Moving Averages Part Two  

Next up is

Average Truth Range

Don’t panic! The average truth range is not a lie detector machine. It merely averages the average trading range of the market  over  a period of time. You can choose whichever time frame that you want to analyze. Let’s say you set ATR  to 20 days on a daily chart . The ATR will show you the average trading range  for the past 20 days for the past  20 days. Let’s see how the ATR looks like.ATR

When ATR falls,it suggests volatility is dropping as suggested by the yellow shaded area But according to the coconut color, when ATR rises, it’s an  indication that ATR is on the rise.

Now onward to:

Types of Breakouts to Trade

There are two types of breakouts you need to keep in mind ifyou’re contemplating trading breakouts. Even more important,knowing  the type of  breakout staring you in the face will help you make sense of the happenings on the market. Even more important, the constant change in supply and demand of the currency pair that you’re trading in triggers huge moves resulting in huge opportunities to rack up some valuable pips.

Continuation Breakouts

Continuation breakouts are situations where major players break out of trading ranges after periods of  consolidation. Here traders take a breather after a long protracted battle trying to jockey for trading position. Once they’ve caught their breath, the traders break out of the range – be it uptrend. Let’s see what the consolidation looks like

continuation-consolidation

 

As you can see in this example, sellers have taken a breather after duking it out with the bulls. The tight range within the two channels reflect the period of consolidation. During this time,they’re figuring out what to do next. The next step most likely is the continuation breakout. Let’s see what this show looks like.continuation-breakout

 

As  you can see, the sellers have made up their minds to launch  one final push through the resistance barrier.They’ve agreed to sustain the original trend and that they believe  the sensible  thing to do would be to break the barrier down and head for the hills..

Reversal Breakouts

Just like their brethren in continuation breakouts players also  take a breather after locking horns with each other. However there is a difference. The difference  here is that the prevailing trend loses momentum after the players’ ability to sustain the trend begins to evaporate. consequently  price is pushed in the opposite direction,resulting in a reversal breakout.

And now to the most exciting  part:

How to Trade Breakouts

How do you trade breakouts? Well you can trade breakouts with three tools – trend lines, channels,and  triangles. You don’t need to look in the mirror for these boys.If you’re able to master recognizing breakouts,you should be able to recognize potential trades at the blink of an eye.First of:

Trend Lines

One way of spotting an imminent  breakout is  drawing trend lines. Now how do you draw a trend line? Just pull up a chart and draw a line that aligns with the current trend. When drawing the trend line make sure it connects at least two tops or bottoms – nothing more, nothing less. Even better, the more tops or bottoms you are able to connect, the stronger your trend line. I guess the more the merrier. Let’s see how the trend line looks like.

falling-trendline

The three yellow circles  indicate the tops and the bottoms on the downtrend. Since they satisfy the requirements for drawing a trend line, you just draw a trend line right through them. The one thing you do not want to do is force non-existent tops nor bottoms on a trend line. That will cost you a lot of money.

How Do we Trade?

When the price approaches the trend line, make sure two things happen:

  • Either the price richochets off the trend line and continues on its merry way.
  • Or the price rams through the trend line and forces a reversal.

If you don’t want to strain your eyes just  looking  at the price, you can always call on moving averages or the average trade range to sort things out for you.

Speaking of trading, we can look at it two ways, if the  bulls break upwards, it’s time to go long(buy.) But if the bears force a reversal and go on a slalom, it’s time to go short(sell). Let’s take a look at the bearish reversal

rising-trendline

As you can see, the yellow circle indicates the beginning of the bearish reversal at the resistance level. after the bullish fade away.  And when you have a bearish reversal, it’s time to go short. If you want to know more about trend lines read up on Drawing and Trading Trend Lines

Next up is

Channels

Channels are just another way of spotting breakout trading opportunities.  Trend channels are very similar to trend lines. Except that trend channels  have one extra trend line. This extra trend line helps spot extra trading opportunities, which should make life very rosy for a lot of traders out there. Even better, you can spot breakouts on either side of the trend. Let’s see what the channel scenario looks like.channel

This is what the rising channel.  You have a an extra trend line on the other side, which should create  a bonanza of breakout opportunities. The yellow circles symbolize those opportunities. You will have to be blind not to spot these opportunities.

How Do We Trade Channels?

Well, you use the same approach for the trend lines. Just wait for the  price to hit  one of the channels. Or you can employ the services any of the two indicators we mentioned earlier. And just like the trend lines, if the bulls break out first, go Long. But if the bears force a reversal and break out go short. Let’s take a look at a bearish situation.rising-channel-breakout

The bears have forced a reversal at the resistance level. This of course has triggered a bearish slalom down the slopes.  Such a scenario should signal to you saying “TIME TO GO SHORT!” If you want to add to your channel knowledge, call on We’re Going To Talk Channels

Now that we’re done with trend lines and channels, the next set of breakout patterns we’re going to look at are:

Triangles

Triangles are just as potent as far as spotting breakout opportunities are concerned. Triangles  take shape when price  starts off wobbly and consolidates into a tight range. And if you’ve seen the phrase”consolidates into a tight range” You’d know that the players are taking a breather to regroup. Your job as a trader is to stay on the alert like a greyhound for possible breakout opportunities, when the big players decide to resume their journey.

There are three triangles we’ll be looking at. The first set of triangles are:

Ascending Triangles

Now ascending triangles come about when  a support level spring up causing price to create lower highs. For the bears this is bad news as the bulls are slowly gaining upon them. Let’s see how this scenario plays out.

 

 

ascending-triangle

The resistance barrier forms nicely with the price creating higher lows. Notice how the higher lows channel intersects with the resistance barrier to form the ascending triangle. As you can see the bulls are gaining on the bulls in the manner in which they keep hammering on the resistance. It’s only a matter of time they break out and head for the hills.

Speaking of breakouts in,  here is how they pan out. Whenever price reaches the support level , the beas  these funny ideas about selling at that level. This of, course forces the price to drop. However, on the other side of the divide, you have these bulls who are like “Hold it, we ought to push the price higher.” So as the price drops,the bulls force the press higher  than the previous low. The ultimate result is an almighty tug of war between the bears and the bulls.

Which brings us to:

How Do We Trade The Ascending Triangle?

Since ascending triangles  are bullish signals, look out for a breakout upstairs. Once you see the resistance  level being breached,  that’s your queue to go long(or buy). Let’s take a look at how this setup pans out.ascending-breakout

The yellow circle indicates the bulls breaking through the resistance barrier. Once the bulls break through and head for the hills, it’s time to place your order to go long.

Next up is

Descending Triangles

Descending triangles are pretty much self explanatory. Arent they?. Unlike the ascending triangles which are dominated by the bulls, the bears run the show. Their attitude is”We’re going to set the price ourselves.” As a result, they steal the thunder from the bulls, which puts a lot of pressure on the bulls. Consequently,this creates  lower highs along the higher side of  the triange(or resistance level)which are met head on by a stiff support level. Let’s see how this scenario plays out.descending

Notice how the bears have created lower highs, triggered by the  pressure they put on the bulls. However, the bears are met by a strong support barrier.

How Do We Trade Descending Triangles?

Well we know descending triangles are bearish signals. Right? So should the bears break through the support level and go on their slalom run, that’s your queue to place your order to go short(buy.)  Here is how the trade plays outdescend-breakout

Symmetrical Triangle

The symmetrical triangle is an interesting beast. Why? Because there is not even a whiff of a support or resistance  level in this set up. However, both bears and bulls create highs and lows simultaneously, resulting in a weird-looking apex in the process. Let’s take a look at how the symmetrical triangle looks like.symmetrical-triangle

 

As you can see, the bulls and the bears are trying to outdo each other with higher lows and lower highs respectively. It’s almost as if they’ve been caught in a trap and are struggling to burst out of it.The question is  how do they break out of this  trap?

Which brings us to:

How Do We Trade Symmetrical Triangles?

As you’re well aware symmetrical triangles  are not equipped with support and resistance levels. So you have a simple option! Just get ready for a jail break on either side of the divide.  Let’s see how the jail break preparation looks likEsymmetrical-breakout

As illustrated clearly,the bulls and the bears  are getting ready to break out of their respective jail cells. The green represents bulls about to head for the hills, while the red arrow points to the bears about to do their regular slalom down the slopes. Whoever  breaks out first you have to capitalize on their trail.

Now let’s see where to place our entries when the bears and the bulls eventually break out of jailtriangle-entry

We see that bulls  are the first to break out of jail. So when the jail breakout starts you place your long entry just above the triangle To protect your position from a possible 360  U-turn by the market, gently place a short entry below the triangle. You can’t wrong with that.

Now let’s see where to place our orders in  the bearish slalom(downward breakout).triangle-bearishbreakout

As you can see the bears don’t want to be left out  of the fun either. They’ve also initiated their own jailbreak, as indicated by the green shade.So when the jail break is on, gently place your short(sell) order above the triangle. To protect your position,in case the market starts sneezing, place your  stop loss below the triangle.

If you want to know more about trading triangles and other chart patterns, read up on Trading Forex Chart Patterns Part I and Trading Forex Chart Patterns Part II .

 

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

 

That’s  a wrap for “Break Out Trading Breakouts. ”  Trading breakouts can be  tons of fun. You get to pick up lots of pips along the trail, if you can recognize the opportunities quickly enough.  Til next time, take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and Get a free eBook- The Beginners Guide to Forex Trading

 

 

 

 

 

 

 

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Let’s Trade Flags

Today I say Let’s trade flags.  And  no, I’m not saying you should swap flags among your flags. The flags I’m referring to popular  chart patterns called flags used in price action analysis. Sure, they are less popular than triangles wedges, and other price action patterns. but they’re just as reliable as the other patterns. So we’re gong to do as we always do. We’ll find out what these flag patterns are and how to trade them. So of we go.

First up is:

What are Flags?

A flag is a continuation pattern where a strong primary trend is followed by a period of consolidation before it resumes in the direction of the dominant trend. Shaped like  a rectangle,the flag is formed by parallel lines that slope  against breakouts emanating from support or resistance levels. Once the flag takes shape,an upward or downward trend,courtesy of the bulls and the bears,respectively suggests that the previous trend is about to resume.

When it comes to identification, the flag can be very difficult to spot. flags can form whenever a currency pair’s price consolidates. However,the most important factor to watch out for is a strong breakout above or below support and resistance levels. They may not completely eliminate the possibility of a reversal,but they do lower the odds.

Let’s take a look at illustrations of bullish and bearish flags.

bullishflag-bearishflag

As you can see,both the bullish and bearish patterns exhibit continuation patterns at the resistance and support levels.  Notice the tall poles that form after breakouts  at both resistance/support levels of the uptrend and downtrend. They help lower the possibility of a reversal.

Next we’re going to look at three Components of a Flag Pattern

First:

Flag  Pole

The flag pole is the main facilitator as far as price action goes.  It is represented quite well by both the uptrend and downtrend. The question bugging most people is “How do you calculate the flag pole’s price move?” Well, calculate the previous swing high or low from the current swing high or low. Let’s  see an illustration below.

flag-pole

Keep watch over the  tall flag pole you see to your left in the bullish pattern. Like I said in my description, the flag pole is the main initiator in the price movement.  Wondering about measuring the price movement?Just calculate the last high/low to the current high/low.

Flag

At the risk of repeting myself, the flag is the real McCoy in this pattern. Like we said earlier, it starts with a strong trend  followed by a period of consolidation where the main players take a breather before resuming hostilities regardless of whether it’s an uptrend or downtrend. Just to refresh your memory,let’s take a look at another illustration of the flag in action.

flag2

 

This is a classic flag move. You have a classic bullish move followed by a period of consolidation, as indicated by the two trend lines. After taking a huge breather, the bulls resume their journey. It goes without saying that long breathers,or long periods of consolidation can lead to aggressive breakouts. It’s like the calm before the storm.

Last but not least:

The Continuation 

This is where the main actors have finished taking a breather and are resuming their journey. In other words, the market  has finished consolidating and the main players are continuing to follow the trend-  whether it’s an uptrend or downtrend.

continuation

This is what  a continuation looks like.  After a taking huge breather(my short for consolidation), the bulls march on upwards. The blue and red trend lines represent  the period of consolidation. Nice looking trend if you ask me.

Now to  the burning question of the day

How Do We Trade Flag Pattern?

Well,

Trading Signal

Just like any other trade,look for a trading   signal. You  can find this trading signal in the breakout. If you are trading the bullish flag, make sure you make your buy trade when the candle closes above the upper side. If  you are trading the bearish flag, place your sell entry on the lower side of the bearish flag pattern.

Stop Loss

Of course, after you make your entry you put in a stop loss. You’d be crazy not to do that. Wouldn’t you?Anyways,for the bullish flag,place the stop loss below the lowest bottom in the flag. Conversely, for the bearish,flag,place your stop loss at the  highest top.

Take Profits

Close out 1/3of your position size and take the profits. This to protect your trade against  any unexpected U-turn by the market.. Also to protect your position, raise your stop loss target just above the initial  profit target. So that if the price reaches your second profit target, you will close another 1/3 of your trading position and lock in with further profits. No what do we do with the remaining trade? You readjust your stop loss just below the second profit target. If the price continues to soar, keep watch over the price action and hold the last 1/3 of your trading position for as long as you see fir.

Let’s take a look at the GBP/USD chart.

Technical-Analysis-Using-Flag-Patterns

As you can see the green circle represents th moment the price broke through the upper  part of the flag. BINGO! That will be the perfect time to make your entry trade. Once you execute the trade you put in your stop loss as shown in S/L1.  Then with each target, you move the stop loss upwards, locking in profits,as price surges on. The magenta nd purple arrows  show the size of the flag and size of the pole. And as each target is hit, the stop loss is adjusted to protect the trading position.

The end comes when the price breaks the third stop order(S/L3).  As I’m sure you’ve noticed,the price reverses, creating unpleasant consequences for the long trade. Now I hope you’re sensible enough by then to get out while you cano r else…….Kum ba yah.

If you’ve stumbled in here looking to join the forex trade bandwagon, here is what you need to do. First,  look up Why Forex Trade Is So popular.  Next, you learn the fundamentals of forex trading by reading  Forex Trading Basics – Top To Bottom Part I  and Forex Trading Basics – Top to Bottom Part II .

To be able to interpret what the candlesticks are telling you, You Need To Know Ten Of These Candlestick Patterns . if you want to give your trading skills an edge by relying on pure price action trading/analysis,  instead of fancy forex robots and fancy indicators,,  get started with What is Price Action Trading?

However, if you only want to trade once a month and watch your entry rack up huge profits over a stretch  of several weeks, consult  How to Spot High Probability Trades.  Dont let me stop you from reading the other posts as well. But the  suggested posts above are the most important posts to get  you started.

That’s wrap for “Let’s Trade Flags.”  I hope you make significant profits with these flag pattern, Till next time take care.

Looking to open a forex trading account?

Sign up with EasyMarkets and Get a FreeeBook- Beginners Guide to Forex Trading