Just like breakouts on your face, the nice thing about breakout trading in forex is that opportunities are pretty easy to spot with the naked eye!
Unlike the former, you don’t even have to look in the mirror!
Once you start getting used to the signs of breakouts, you’ll be able to spot good potential trades fairly quickly.
Chart Patterns
By now they should accustom you 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.
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.
So how can you use trend lines to your advantage? When the price approaches your trend line, only two things can happen.
- The price could bounce off the trend line and continue the trend.
- The price could break out 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 mentioned earlier in this lesson 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.
