By now you should be accustomed to looking at charts and recognizing familiar chart patterns that indicate a reversal breakout.
Here are just a few:
- Double Top/Bottom
- Head and Shoulders
- Triple Top/Bottom
For more information check out our lesson on chart patterns.
In addition to chart patterns, there are several tools and indicators you can use to supplement your case for a reversal breakout.
On a chart, establish trend lines to help you identify potential breakouts.
You may create a trend line by simply drawing a line that follows the current trend on a chart.
- The trend might continue if the price bounces off the trend line.
- The price can pierce the trend line and reverse course.
We need to maximize on that breakaway!
However, simply examining the pricing is insufficient. Using one or more of the markers described earlier in this session will be quite helpful in this situation.
Note that the MACD was displaying bearish momentum as the EUR/USD violated the trend line.
With the use of this knowledge, we can confidently assert that the breakout will continue to drive the euro lower and that, as traders, we ought to short this pair.
Drawing trend channels is another method for identifying breakout chances.
Drawing trend channels and trend lines are nearly identical, with the exception that you must add the other side after drawing a trend line.
Because you may identify breakouts in either side of the trend, channels are helpful.
In the same way that we approach trend lines, we use the indicators to guide our decision-making after waiting for the price to cross one of the channel lines.
Observe that as the EUR/USD dropped below the trend channel’s lower line, the MACD was displaying a strong negative momentum. A short cut would have been wise at this point!
Next Lesson: How to Measure the Strength of a Breakout