A breakout is anything unusual. Similarly, when a stock price goes beyond a defined resistance or support level with increased volume, it is a breakout. When the price rises after it breaks a certain level of resistance in Forex trading, we call it a Forex breakout. Forex breakouts can also occur when specific levels, like resistance and support level, the Fibonacci level, or the pivot points, are breached.
Breakout trading is popular in Forex as it provides the risk-reward ratio. It also enables the traders to identify the position that they will hold. Traders and investors use breakout trading indicators to make their strategies. First, let’s know more about this term.
Defining a Breakout
Breakout represents a trend change in the trading time frame. For example, if the price rises last 24 hours on an hourly chart, and if the price breaks the last 24 hours trendline, then breakout occurs. Breakout is sometimes tricky to figure out because sometimes it is tough to distinguish between consolidation and breakout.
It might be a word that they would never want to face or hear for a teenager, but it means a lot for a trader. Breakouts help in clearing many crucial levels on a chart. These are psychological levels that resonate with how the day trader might be feeling or what their sense might be telling them about price levels. We all know that trading is not a place that emotions can successfully run. Breakouts help in clearing such blocks.
While the breakout day trading can help an ordinary trader transform into a brilliant trader, it can also make you face losses if you day trade quickly because the prices tend to revert to their original mark. This situation can be easily avoided by learning the art of patience. Trade only when you are certain that the odds are in your favor. You need to be able to distinguish between genuine and fake breakouts. Yes, it is easier said than done, but with the help of the best Forex breakout indicators available on various platforms, you can easily learn to do it.
How to Use Forex Breakout Strategy Indicators
Trading breakouts are not successful when the market is not trending. It will also work when the market conditions are range-bound; that is, the price action needs to be close to the upper end of the market range. If the market conditions are right, the following strategies and indicators can help you form successful trading strategies.
The best indicators for breakout trading
Breakout Trading Indicators are MACD, RSI, Volume indicator, and all oscillator indicators. Traders can draw a trendline on an oscillator indicator line. If the price level breaks the trendline, then the breakout will happen.
Below you can see the RSI trendline breakout example:
The best breakout trading indicators are:
- Moving Averages Convergence/Divergence (MACD) – One of the most common Forex breakout strategy indicators that traders use in the MACD. While this indicator appears simple and is easy to understand, it is highly dependable as well. Its histogram templates indicate a rise in momentum. Though it indicates a rise, it is used to identify a reversal in trends. You can do this by looking out for divergences that can be clearly spotted when indicators and prices move in opposite directions. As the MACD indicates momentum, you will see movement upon the triggering of the market trends. Many traders swear by the MACd as it helps them distinguish stable trends and those that could close without warning.
- Relative Strength Index (RSI) – RSI helps in confirming reversal breakouts. Similar to the MACD, you can use this indicator to spot the divergences. Once these divergences are identified on time, it becomes easy to predict if the trend will reverse or not. You can use this indicator to check how long a trend has been overbought or oversold. The market is considered overbought if the RSI value is above 70 and oversold if the value is 30.
- The Volume Indicator: Both veteran and new traders consider volume as an important trading indicator. You can conduct volume analysis with it and can help in the assessment of the trend health. Volume Weighted Moving Average (VWMA), a volume-related tool, can enable you to identify the breakouts.
Swing traders and intraday traders regularly participate in breakout trading. It works perfectly in a choppy market as it allows the traders to keep their investments safe.
How to Avoid False Breakouts in Forex?
To avoid false breakout traders can apply the following rules:
- Create trades that follow the main trend. For example. buy position that shows breakout on 30 minutes chart and follows the bullish trend on Daily chart.
- Entry in the position if fundamental analysis and current economic news are on your side of the trade.
- The stronger support or resistance breakout is, the smaller probability is to be a false breakout. For example, if price has broken 30 days high it is a smaller probability to be false breakout than if the price breaks 1 day high.
- As long as the price is above broken resistance or support, the probability to be false breakout is smaller.