Understand one thing off the bat; breakouts are a trader’s holy grail. You’ll probably hear about breakout in every trading conversation you have. What’s more confusing, breakouts may mean different things from trader to trader. What exactly is a trading breakout, and how do you learn to use them in your success strategy as a trader?
Trading Breakouts 101 – A Straightforward Explanation for Beginners
A breakout, in trading, refers to a change in trends within a trade, say forex currency pair or stock. A breakout signifies the beginning of a new trend in any direction that experienced and novice traders can take advantage of and initiate low-risk, and potentially high-return positions.
As simple as they might appear, breakouts can be hard to catch at the right time for new traders. At the same time, there are other factors you need to consider before you devise a trading strategy based on breakouts. Nevertheless, understanding how to identify breakouts and latching on them is one of the most important and rewarding skills you can acquire as a trader.
As a recap:
- Breakouts occur when the commodity, or whichever item you are watching moves beyond a certain pre-defined resistance level in either direction (short or long position). For instance, in forex trading, a currency pair’s value could swing above a specific price point after having held at a position for a considerable period.
- Breakouts signify the beginning of trend and volatility that you can take advantage of a swing trader.
- Breakout trading can be applied in all types of trades, be it forex stocks, derivatives, commodities, and whatnot.
- Breakout trading works for any trader, be it long term speculators or day traders.
- Breakout trading can be lucrative since it usually involves enormous price movements or long favorable trends in your favor.
What You Need to Know About Breakout Trading
Two Types of Breakouts in Forex
Breakouts in forex are different from stock and other types of trading. For instance, forex traders don’t have the luxury of watching trading volume to see volatility and choose when to latch into a breakout pattern. In online trading platforms dedicated to forex, there are two types of breakouts that you can take advantage of: Reversal breakouts and continuation breakouts.
In the simplest terms, reversal breakouts occur between a short consolidation period or pause and an opposite movement. This signifies a change in a price trend for the currency pair in the opposite direction and probably the right time for you to jump in.
They are the opposite of reversal breakout. Continuation breakouts occur after a brief consolidation pause and continued movement in the previous direction. This signifies that the previous trend was the correct trend, and currency pair prices will probably enter into a similar trend as they were just before the consolidation period.
Beware of False Breakouts
Just as both breakouts are common in forex price movements, temporary spikes that go beyond a certain trend or price point can be confused with breakouts. In a bid to latch into a breakout and make an easy profit, greedy or novice traders tend to jump onto a spike early that turns out to be a false positive. Whatever you choose to do, always take time to understand how to read and take advantage of breakouts before you make them your primary trading strategy.
Identifying and Reading Breakouts
Identifying breakouts, whether in forex or stock trading, requires one to have the ability to read patterns and chart formations with ease. Some of the most valuable formations you can use to identify price breakouts include triangles, channels, and flags. You should also be able to identify viable resistance levels for whichever currency pair, stock, or commodity you are watching to know when there is a breakout.
All in all, breakout trading can be fun and make it easier to make fast gains in the market if you can understand how to identify one. Take time to understand how the stock or currency you are trading is moving and you won’t have much trouble seeing a breakout when it occurs.