Trading forex breakout is one of the most popular strategies that most traders love to use. The reason why it is so popular is because of its ease of execution and it can even be used by new traders as well.
However, there is a major problem for those who want to trade forex breakout: Fake outs. The fake out is one of the most common reasons why traders lost their money when trading breakout. It is a sudden fake movement of a price in a certain direction leading the traders to believe that a breakout has occurred and then placed positions in the direction of the fake movement.
What happened next is the price suddenly moves back and then triggers all the stop losses that are set by those traders who enter their trade. Therefore it is very important for those of you who are interested in trading breakout to learn how you can make use of some indicators that are known as forex breakout indicators to increase your odds of winning.
Here are some forex breakout indicators you should use
1) Bollinger Bands: This is an indicator that has an upper band and a lower band to help you check the volatility of the currency you are trading. Before a breakout occur, the price usually will consolidate and then compress. This can be observed by using the bollinger bands as consolidation can be seen when the bands are narrow and a breakout occur when the bands become wide.
2) Moving Average Convergence Divergence: This is also known as MACD and this is the tool that you will be using to help you confirm a valid movement. Using the Moving average convergence divergence indicator, you will be able to more effectively avoid fake outs which will then increase your odds of winning in trading. You can use the MACD and its trigger line as well as the histogram to help you confirm a valid breakout. When you see the price breaching a trend wall, you need to have the crossover of MACD and its trigger line to confirm it as a valid movement. If the price breach a trend line or trend wall and you do not have a crossover in action, you are most probably seeing a fake out.
3) Stochastic: The next forex breakout indicator you can use macd indicator to help you in this kind of trade is the stochastic. It will be best if you are patient to wait for the stochastic to go oversold before you enter a trade for a bullish movement or wait for the stochastic to go overbought before you enter a trade for a bearish movement.
One of the most popular ways to make money from the forex markets is to trade divergence patterns. You can spot these patterns when you use certain technical indicators and apply them to your price charts. However let me first of all explain what divergence actually is.
Divergence is simply where the price makes new highs but the technical indicator in question fails to make new highs. Similarly if the price makes new lows but the indicator you are using fails to make new lows, then this is also a good divergence pattern.
This is useful because it is basically telling you that the latest price move is running out of momentum. So therefore there may be decent profits to be had by trading any reversals that may subsequently occur.
So what kind of indicators can you use to spot these divergence patterns?
Well the most effective indicator for spotting these potentially profitable patterns is arguably the MACD indicator. This is a very popular indicator amongst the forex trading community and is very useful here as well because if the price of a currency pair makes new highs, for instance, but the MACD (and ideally the MACD histogram as well) fails to make new highs, you know that the upward move could be coming to an end.
If you want additional confirmation that a reversal could be about to occur, you can also look for divergence on some of the other indicators as well. Some of the most effective ones to use for this purpose are RSI, CCI and Stochastics.
In an ideal world you would want to see a strong sign of divergence on at least two of these indicators in order to trade a reversal with any confidence. It’s also important to note that these reversal patterns are best used on the longer time frames.