What are breakouts, and how can I use them to my advantage?
A breakout in the trading business is a little different from the breakouts you might have experienced as a teenager.
When the price “breaks out” of a trading range or kind of consolidation, this is known as a breakou|
A breakout can also happen when a certain price level, such as a pivot point, a support or resistance level, a Fibonacci level, etc., is crossed.
When trading breakouts, the objective is to enter the market as soon as the price achieves a breakout and to stay in the trade until volatility subsides.
Volatility, Not Volume
You’ll see there is no method for you to view the volume of trades done in the currency market, unlike when trading stocks or futures.
Volume is crucial for executing successful breakout trades in stock or futures transactions, thus the lack of this information in the forex puts us at a disadvantage.
Due to this drawback, we must rely on both solid risk management and a set of criteria in order to set ourselves up for a successful prospective breakout.
Volatility is deemed high if there is a significant price change within a brief period of time.
On the other hand, volatility is said to be minimal if there is little movement over a brief period of time.
While it may be tempting to invest when the market is moving at lightning speed, you will likely end up feeling more agitated and anxious and making poor selections as your money goes in and then immediately out.
Many forex traders are drawn to this extreme volatility, but it is also this volatility that kills many of them.
Here, you want to take advantage of instability.
It would be wiser to look for currency pairs with very low volatility rather than trying to enter the market when it is really volatile and following the crowd.
In this manner, you can set yourself up and be prepared for when a breakout takes place and volatility soars!
Next Lesson: How to Measure Volatility
