Summary: Trading Breakouts and Fakeouts

Trading Breakouts

A breakout occurs when the price moves beyond a certain level. So, breakout trading is entering trades when momentum is in your favor.

Therefore With breakout trades, the aim is to enter the market right when the price makes a breakout and then continue to ride the trade until volatility dies down. Breakouts are significant because they point out a change in the supply and demand of the currency pair you are trading.

You will observe that, unlike trading stocks or futures, there is no way for you to see the volume of trades made in the forex. Because of this, we need to rely on volatility.

Volatility measures the difference between the opening and closing prices over a certain period of time. This means it measures the overall price fluctuations over a certain time and this information can be used to detect potential breakouts.

Chart Indicators to Measure Volatility

There are a few indicators that can help you gauge a pairs current volatility.

Using these indicators can help you tremendously when looking for breakout opportunities.

• Moving Averages (MAs)

• Bollinger Bands (BB)

• Average True Range (ATR)

Types of Breakouts

There are two types of breakouts:

• Continuation

• Reversal

How to Spot Breakouts

To spot breakouts, you can look at:

• Chart Patterns

• Trend lines

• Channels

• Triangles

How to Measure Breakout Strength

You can measure the strength of a breakout using the following:

• Moving Average Convergence/Divergence (MACD)

• Relative Strength Index (RSI)

Lastly, breakouts mostly work best, and for genuine with some kind of economic event or news catalyst. Always be sure to check the economic calendar for upcoming news before figuring out whether or not a breakout trade is the right play for the situation.

Trading Fakeouts

Fakeouts are when a trader puts on a position expecting it to move in a direction and it fails to do so. Many traders will plan their exit by offsetting orders to make sure their potential losses are limited.

Institutional traders like to fade breakouts. So we must like to fade breakouts also.

Are you going to follow the crowd, or are you going to follow the money Think, act, eat, sleep, and watch wisely the same movies as these guys do. If we can trade in the same way the institutional players do, success is just a glimpse away.

Fading breakouts simply means trading in the opposite direction as the breakout. You would fade a breakout if you believe that a breakout from a support or resistance level is false and unable to keep moving in the same direction.

In a situation where the support or resistance level broken is significant, fading breakouts may prove to be smarter than trading the breakout. Potential fakeouts are usually found at support and resistance levels created through trend lines, chart patterns, or previous daily highs or lows. The best outcomes tend to occur in a range-bound market. However, you cannot ignore market sentiment, common sense, and other types of market analysis.

Financial markets spend a lot of time recovering back and forth between a range of prices and do not deviate much from these highs and lows. Finally, the odds of a fake out are higher when there is no major economic event or news catalyst to shift traders sentiment in the direction of the break.