What are breakouts and how can I take advantage
of them?
Unlike
the breakouts you might have had as a teenager, a breakout in the trading world
is a little different!
A
breakout occurs when the price "breaks out" (get it?) of some kind of
consolidation or trading range.
A
breakout can also occur when a specific price level is breached such as support
and resistance levels, pivot points, Fibonacci levels, etc.
With breakout trades, the goal is to enter the market right when
the price makes a breakout and then continue to ride the trade untilvolatility dies
down.
Volatility, Not Volume
You'll
notice that unlike trading stocks or futures, there is no way for you to see
the volume of trades made in the forex market.
With
stock or future trades, volume is essential for making good breakout trades so
not having this data available in the forex leaves us at a disadvantage.
Because
of this disadvantage, we have to rely not only on good risk management, but
also on certain criteria in order to position ourselves for a good potential
breakout.
If there
is large price movement within a short amount of time then volatility would be
considered high.
On the
other hand, if there is relatively little movement in a short period of time
then volatility would be considered low.
While it's tempting to get in the market when it is moving faster than a speeding bullet, you will often find yourself more stressed and anxious; making bad decisions as your money goes in and then goes right back out.
This high
volatility is what attracts a lot of traders, but it's this same volatility
that kills a lot of them as well.
The goal
here is to use volatility to your advantage.
Rather
than following the herd and trying to jump in when the market is super
volatile, it would be better to look for currency pairs with volatility that is
very low.
This way,
you can position yourself and be ready for when a breakout occurs and
volatility flies off the roof!
