Forex breakout is one of the most important elements in forex trading: if you manage to predict a moment in which some price will break a certain level, you can earn, and you can earn a lot. That’s why we decided to sum up everything you need to know about this topic in one article. Just keep reading!
Forex Breakout | Definition
We will start our Forex breakout analysis by explaining the term. A breakout appears when a price moves through an identified level of resistance. This movement is almost always followed by a big trading volume and increased volatility. When the price breaks a resistance level, it usually becomes the next support level. Traders can use various Technical Analysis tools (such as chart patterns and trend lines) to determine the price points at which a breakout can occur.
The most important cause of forex breakout is the difference between supply and demand. Accumulation of some security at a particular price level creates a big increase in supply. This, in turn, overwhelms demand and it slows down the price’s upward movement. Resistance is reached when the market absorbs this level of supply and it’s manifested as a sharp upward moment – forex breakout. Besides that, some important news can also cause a forex breakout because new information can quickly change traders’ minds about an asset. But how to trade when you find yourself in a situation like this? Read on!
Forex Breakout | Trading Breakouts
When we talk about trading breakouts, you should first closely observe a security’s support and resistance levels. Every time the price touches these areas, these levels become more important. When prices consolidate, you will notice various patterns on the chart (triangles, channels or flags).
The next step is to find the entry point. When the price is about to close above a resistance level, investors will establish bullish position, and when they look like they’re going to close below a support level, a bearish position will be established. In order to make a profit, though, you will also need a proper exit Strategy. A very good idea is to calculate recent price swings and get an average to define a relative price target. You can also use recent price action to establish a price target.
A thing opposite to forex breakout is a fakeout. This is the situation where you expect a certain movement, but the market moves in another direction. These usually appear before a stronger trend emerges, and it usually happens in the morning, when many banks open for business (prices rise due to the bigger initial trading volume). As we said, fakeout is usually followed by a bigger move, so it can be a good trading indicator. Additionally, this is why you want to confirm a move with several indicators – to not get faked out.
Forex Breakout | Conclusion
As you’ve seen, recognizing a forex breakout is an important element of forex trading. There are several things you have to do when it comes to trading in these circumstances. First, you have to recognize the entry point. Then you have to know when to close the trade. Also, beware of fakeouts! They can fool you if you’re not careful, but if you are, they can help you. Apart from this, there are much more things traders can learn to increase their chances, so browse around our website and see what you can find.