I mean… you obviously heard about the word “breakout” by now. If not, I suggest you start reading this blog more often or check out some of the technical analysis our team prepares on daily basis to help you improve your trading.
Where was I… Oh yes. A breakout. In case you don’t know what is a breakout, this is your lucky day. Below you can find a simple explanation and ways to differentiate them.
Definition by Investopedia
“A breakout is a price movement of a security through an identified level of resistance, which is usually followed by heavy volume and an increased amount of volatility.”
In Forex, a breakout can happen not only in one direction. As traders have the ability to trade currency pairs up or down, breakouts can happen in both, resistances and support levels.
If a currency pair moves above a resistance level, we call it a breakout. If a currency pair moves below a support level, we also consider it a breakout. In both scenarios, the price is breaking a certain mark, possibly opening the doors to an extension in that same direction.
Once a breakout takes place, the resistance or support level that has been penetrated changes for a new one, which can be close to the initial mark or not so close. Depends on many factors.
Trading breakouts is not easy. Well… Nothing about Forex is really easy, except for the fact that if you have a few winning positions, you can make a great amount of money. Dot.
Once the price breaks above or below a certain key level, traders should keep monitoring volumes. A break above a resistance when volume is strong can indicate an upward extension. On the contrary, if trading volumes are down, then a correction is likely.
Continuation breakout
As a trend develops, markets might feel the necessity to take a breather from time to time. In those periods of time, a continuation breakout can take place. In other words, we are talking about a break and then a consolidation that is later followed by an extension of the trend itself.
Reversal breakout
Same case than the previous one, but instead of continuing in one direction, the consolidation serves as a time to gain strength and move in a different direction.
