The nice thing about breakouts in Forex is that you can see them with the naked eye in most cases. You will want to confirm that what you are seeing is for real, but you can at least start to gather information about what you believe to be a breakout occurring in the market just by looking at your charts.
Once you have gotten a handle on what a breakout looks like, you will be able to spot them like a pro.
Trend Lines
How often do you use trend lines when you are trading? Whatever your regular usage of trends is, you should probably bolster it a bit more. There is a bias among some traders against using trend lines for whatever reason, but they can actually prove to be extremely effective in your trading strategies. There is absolutely no reason to avoid them, and you should actually probably use them more than you are right now if at all possible.
Just draw a line that connects the last two tops or the last two bottoms together to establish a trend. The more tops and bottoms that you can connect, the more powerful that trend line really is.
Once you have your trend lines in place, you will see one of two things happen. Either the price action will bounce right off the trend line and continue the trend, or it will go through the trend line and create a reversal situation.
This will give you an early indication of what may be going on with the price action, but you will also want to apply some indicators to verify that you are actually looking at what you think you are looking at.
Channels
You can also draw channels on your charts to see if you can find what you are looking for in a particular trade. In other words, you should draw channels to help identify what kind of pattern the currency pair appears to be holding in right now.
A currency pair that is in a rising channel (a series of higher lows) may eventually show a breakout pattern if it breaks through the bottom of the channel that you have drawn for it. If you notice this happening and confirm that it has happened by using indicators available to you, then you may want to hop into a trade that takes advantage of this type of movement.
Triangles
The use of triangles is yet another way that you can try to determine when a breakout is happening and what you might do about it.
There are three types of triangles that you should be on the lookout for when trading.
They are:
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Ascending triangles
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Descending triangles
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Symmetrical triangles
These are all useful for your trading purpose and for spotting breakouts, so make sure you know what to look for.
Ascending Triangles
These form when the resistance levels and the market price of a currency are making higher lows. This should be a sign to you that the bulls in the market are gaining momentum and that a breakout to the upside may be about to occur. Traders see the price dip somewhat and just want to get back in to buy some more. The bulls are winning the battle against the bears in this scenario.
Descending Triangles
These triangles are the mirror opposite of ascending triangles. They appear when lower highs continue to form in a currency pair. They may be indicating that a breakout to the downside is about to take place. Indeed, many people read them that way, and you may want to take these seriously as they could spell trouble if you happen to be a holder of the currency pair that is giving off this sign.
Symmetrical Triangles
These triangles don’t have a bias towards the upside or the downside. They are merely triangles that indicate that something may be about to break out in one direction or the other. When this type of triangle is seen, traders may realize that they are looking at some kind of action that is about to take place, but it may be unclear to them which direction this one is about to take. Thus, they may want to steer clear from trading on this one until they are more certain about which way they believe it is likely to go.
However, in the case of the symmetrical triangle, some traders that want to position themselves for both an upside or downside breakout will often use a one-cancels-the-other (OCO) order to straddle the tip of the triangle.
Ultimately, a breakout can be a very dramatic moment in the market that you are dealing with, but you should only trade it if you are very confident in the direction that you feel the market is about to go. If not, you may put yourself in a spot where you are trading based on faulty information that is of no use to you.
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