Types of Breakouts
- Reversal breakouts
- Continuation breakouts
Knowing what type of breakout you are seeing will help you make sense of what is actually happening in the big picture of the market.
Breakouts are significant because they indicate a change in the supply and demand of the currency pair you are trading.
This change in sentiment can cause extensive moves that provide excellent opportunities for you to grab some pips.
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.
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”. You catch on quick!
Now we know by now you are super excited to start trading breakouts but you also have to be careful.
False breakouts occur when the price breaks past a certain level (support, resistance, triangle, trend line, etc.) but doesn’t continue to accelerate in that direction.
Instead, what you might’ve seen was a short spike followed by the price moving back into its trading range.
A good way to enter on a breakout is to wait until the price retraces back to the original breakout level.
Another way to combat fake outs is by not taking the first breakout you see!