Understanding Forex Trading Breakouts

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What Are Forex Trading Breakouts?

It’s something that the most skilled and battle hardened forex traders still struggle to get right with 100% accuracy. Forex trading breakouts refer to the price of a currency pair “breaking out” of their existing trading range, and venturing into unknown territory.

Trading breakouts are extremely exciting for forex traders because when correctly picked, and jumped on – like a prize stallion, they’ll gallop off in the intended direction and can bring tremendous profits in a relatively short space of time.

The problem is that all too often, it’s difficult to identify a breakout correctly. Many breakouts are false – the price looks like it’s pierced support or resistance, only to turn right around and head back towards its previous trading range (of course only after you’ve unwittingly taken a position that anticipates a furious breakout).

Different Types Of Forex Breakouts

Trading breakouts successfully will provide you with some of the biggest forex profits you’ll ever enjoy. Breakouts signify a fundamental shift in the mix of demand/supply of a currency pair. Identifying breakouts early enough allow traders to profit from the best part of a currency trend – getting in just as the breakout starts and riding the peaks and troughs, and perhaps even enjoy some range trading in between.

The two major breakout types are continuation and reversal. Let’s look at each of these in turn:

Continuation Breakouts – This happens when the price of the forex currency pair continues moving in the generic trend after taking a breather. Currency pairs move in certain patterns – when when a currency paid is trending in one direction, it wont go in a straight slanted line. Typically, in the midst of the trend, a currency pair will have a bit of a rest and go sideways for some time. It trades within a range during this sideways movement, and this is known as consolidation. The currency pair bounces up and down without any real trend. After a while, the price of the currency pair will continue moving in the direction of the original trend – and in doing this will break out of the trading range it had formed during the consolidation period. This is known as a continuation breakout – because the currency price continues in the same direction of the trend.

Reversal Breakouts – These are the opposite of continuation breakouts. Reversal breakouts start off in the same way as continuation breakouts – a period of clear trending is broken by the price forming a base trading range (consolidation). The currency pair pings within the consolidation range for some time – however, it finally breaks out in the opposite direction of the original trend.

False Breakouts – False breakouts happen a lot in forex trading, and many a newbie has been tricked by the markets into opening terrible positions believing a breakout to be on the cards. A false breakout is when the price appears to poke its head above perceived support/resistance, only to ultimately reverse and head back towards the consolidation range.

Experienced forex traders use certain tactics and strategies to try and minimize the risk of trading on the basis of false breakouts.