For Forex trading in particular and financial trading in general, the Breakout trading strategy is a simple and popular strategy among traders. But even so, most traders always fear false breakouts, which are the market’s signal noise. When this happens, it is not pleasant at all, not to mention it also leads to losses.
Investment strategies are not always effective at all times and in all circumstances. The strategy of buying and selling when breaking out is no exception in the forex market.
Therefore, learning which stages and under what conditions this strategy is effective will help investors improve their profits. Let’s learn more about Learn Forex Trading in the content below.
What is Breakout?
A breakout occurs when the price breaks a fixed or a certain sideways price range. To limit this, you can try using Forex robots or financial leverage ratio.
Frequently, trading occurs when a particular price range is broken as support or resistance. With Breakout trading, the goal is to enter an order as soon as the price breaks out and continue to follow the market until volatility subsides to seek profits.
Besides, trading volume is necessary for good trading. Therefore, not having volume data in the forex market is no small omission.
We rely not only on good risk management skills but also on certain factors to choose potential breakout trades, with the expectation of profiting from the market.
See more: You will lose if you do not know about Trading
Types of Breakouts in the Forex Market?
The most commonly used breakouts are support and resistance breakouts; these are important price zones.
And today there are many technical tools that help identify important levels. Traders draw these levels based on previous highs and lows, using Fibonacci Retracements and Pivot points, trend lines, etc.
These important levels act as support or resistance to the price. The more times the price touches that level, the more accurate the price you find is and the less likely it is to break.
Then, when the price breaks a key level, it means it will continue moving in that direction.
However, that only happens in case of a real breakout, and it doesn’t happen often.
In some cases, the price crosses the key level but does not continue in the direction of the Breakout. Instead, it returns to the previous trading range, which is a false break, and so the false break leads to losses.
Thus, there are two types of markets: fake breakouts and real breakouts.
A real breaking case
One problem is how do we know if the breakout method is right or wrong? It is difficult to determine, as soon as the price moves to another level. At the same time, it is clear that a trader needs to trade real breakouts and fake breakouts, which is not easy at all.
Pay attention to price patterns such as channels and triangle patterns. Flag patterns can be really valuable for identifying potential breakout points. The larger this level is, the harder it is for the price to break it. At the same time, remember that a real break at this level would likely sustain the price moving in the direction of the Breakout more strongly.
Fake Breakout cases in the foreign exchange investment market
Breakout trading is a popular trading method. However, it’s not a simple matter. Especially when encountering a false break.
A false breakout is a phenomenon on the Forex price chart when a certain price level is broken. But then suddenly changed direction, no longer following the breakout direction.
When the first breakout occurs, many traders get caught up in trading by entering in the direction of the market’s breakout. When encountering a breakout, their orders can easily swing to the top when buying and swing to the bottom when selling.
The biggest fear in Forex trading with Breakout is also this, encountering a fake breakout . If you do not learn how to identify a False Breakout correctly. You cannot trade and make a profit.
So, how do we avoid false breakouts?
Quite easily, the way to identify a fake Breakout is to carefully observe the trading volume.
A true Breakout typically has a strong increase in trading volume. When trading volume is low, there is a high chance that the Breakout phenomenon will fail, which is extremely important.
A case of false break.
It is no coincidence that trading volume is so important and is discussed very carefully in Dow theory.
If price and volume fluctuate in the same direction, the trend will be well-maintained and strong. If these two quantities have opposite direction. The current trend will easily reverse. This is even more important at breakout points. If the price breaks a resistance level to go up but the volume drops sharply. The risk of failure at that point is very large.
In real trading, it can be said that there are more false breakouts than real ones. New traders tend to rush into trading methods without confirmation of a breakout point. Therefore, they often suffer losses and suffer heavy losses.
Immediately after the breakout, the price returned to the previous trading range and stayed there. It is a false breakout , creating a reversal candlestick pattern near that trading area. Gives reliable signals that the breakout is fake. This is very important and in fact it often happens.
See more: Opening and verifying an ICMarkets account
Notes when trading Breakout
The profits from trading are not small. However, the fear of fake breakouts is still a difficult problem for traders. Once you decide to trade using this method, it means you have a higher risk than other methods. With managing your risks in trading. You should move the Stop Loss order to the fast breaking level, to preserve your capital.
If the Risk:Reward ratio in each case can be up to 1:4, 1:5. You should participate in the trading order but you can use the partial order cutting method, to preserve profits.
If there is a confirmation, although it is not important, it is possible for us to distinguish between a false breakout and a real breakout. A real breakout requires more confirmation than a false breakout.
Never forget economic news. Because it has a very strong influence on psychology and trading feelings, these can give you hints about what is actually happening on your trading charts. Especially economic events that have a strong influence in a short period of time.
Epilogue
Hopefully the sharing from Learn Forex Trading above has helped you understand what Breakout is. At the same time, know how many types of Breakouts there are on the market today. Hope it is useful to you!
