Hello community members, fresh month fresh opportunities waiting for everyone in the time coming ahead. So, i am here with a new article which may enhance your trading ability and make you gain some nice profit this month. This may change the way you look at the market. As my title is very much clear, we are going to learn about "Breakouts and Fakeouts".


A breakout can 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 until volatility stay alive. 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.

How to Measure Volatility:

Volatility measures the overall price fluctuations over a certain period of time and this information can be used to detect potential breakouts. There are a few indicators that can help you gauge a pair’s current volatility.

#1 Moving Average:
Moving averages are probably the most common indicator used by forex traders and although it is a simple tool, it provides invaluable data. Moving averages measures the average movement of the market for an X amount of time, where X is whatever you want it to be.
#2 Bollinger Bands:
Bollinger bands are excellent tools for measuring volatility because that is exactly what it was designed to do. Bollinger bands are basically 3 lines that are plotted 2 standard deviations above and below a moving average for an X amount of time, where X is whatever you want it to be.
When the bands contract, it tells us that volatility is LOW.
When the bands widen, it tells us that volatility is HIGH.

Types of Breakouts:
1. Continuation breakouts
2. Reversal breakouts


Continuation Breakouts:

Sometimes when there is an extensive move in one direction the market will often take a breather. This occurs when buyers and sellers pause to see what they should do next. As a result, you will see a period of range-bound movement called consolidation.
If traders decide that the initial trend was the right decision, and continue to push the price in the same direction, the result is a continuation breakout.
Reversal Breakouts:

The only difference is that after this consolidation, forex traders decide that the trend is exhausted and push the price in the opposite or “reverse” direction. As a result, you have what is called a “reversal breakout”.
How to trade Breakouts:
#1 Trend Lines:

The first way to spot a possible breakout is to draw trend lines on a chart. To draw a trend line, you simply look at a chart and draw a line that goes with the current trend.

When drawing trend lines it is best if you can connect at least two tops or bottoms together. The more tops or bottoms that connect, the stronger the trend line. When the price approaches your trend line, only two things can happen.
1. The price could either bounce off the trend line or continue the trend.
2. The price could breakout through the trend line and cause a reversal.
We want to take advantage of that breakout. Looking at the price is not enough however. This is where using one or more of the indicators could help you tremendously.

Notice that as EUR/USD broke the trend line MACD was showing bearish momentum. Using this information we can safely say that the breakout will continue to push the euro down and as traders, we should short this pair.

Triangles:The other way you can spot breakout opportunities is by looking for triangles. There are 3 types of triangles:
#1 Ascending triangle: Ascending triangles form when there is a resistance level and the market price continues to make higher lows. This is a sign that the bulls are slowly starting to gain momentum over the bears.
What we are looking for is a breakout to the upside since ascending triangles are generally bullish signals. When we see a breach of the resistance level the proper decision would be to go long.

#2 Descending triangle: Descending triangles are basically the opposite of ascending triangles. Sellers are continuing to put pressure on the buyers, and as a result, we start to see lower highs met by a strong support level.

Descending triangles are generally bearish signals. To take advantage of this, our goal is to position ourselves to go short if the price breakout below the support level.

#3 Symmetrical triangle: Rather than having a horizontal support or resistance level, both the bulls and the bears create higher lows and lower highs and form an apex somewhere in the middle.
Unlike the ascending and descending triangles which are generally bullish and bearish signals, symmetrical triangles have NO directional bias. You must be ready to trade a breakout on either side! In this scenario, GBP/USD broke out on the upside and our long entry was triggered.

How to Avoid Fake outs:

Breakouts are very popular among forex traders. And it has fair reason for that. When price finally “breaks” out of that support or resistance level, one would expect price to keep moving in the same direction of the break. But that does not happen every time. You have to keep patience when you smell a breakout is going to happen.
Wait for it, just a few more moments to see price inch one direction, then suddenly move miles in the opposite direction!

That could be disastrous for any account or trader. What can be done to avoid it? Well, there is a way!
Support and Resistance Levels: One thing you should remember to note about support and resistance levels is that they are areas in which a predictable price response can be expected.
Support levels are areas where buying pressure is just enough to overcome selling pressure and halt or reverse a downtrend.
Resistance levels are just like support levels but work in the opposite way. They tend to halt or even reverse uptrend. It’s not enough learning about breakout strategies because there will be times that breakouts FAIL. We have to know what to do in case of fake outs. And here is where support and resistance and trend lines will play an important role.
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