Introduction
In the past few articles, we have discussed a lot of things related to trading breakouts and fakeout. The purpose of this article is to summarize the fundamentals of these concepts and understand what we have discussed until now.
Breakout trading is one of the most popular and straightforward approach to trade the market. Most of the technical indicators lagged in the market, but the breakout trading is a way to finish this lag between the entry and the trading signal. By trading the breakout, the goal of the trader is to enter the market right when the breakout happened and holds the trade for the brand new higher high or lower low.
Volatility plays a significant role in the breakout trading to ride the longer moves, in the stock market you can use the volume indicator to find out the market volatility, but in forex trading, there is no way to see the volume visually. To overcome this issue, there are various indicators in the market used by the traders to gauge the market volatility of any underlying asset. Using these below indicators, you can measure the volatility.
- Bollinger Bands.
- Moving Average.
- Average True Range {ATR}.
There are usually two types of breakouts which are very popular among traders.
- Continuation.
- Reversal.
Continuation – Continuation is a type of pattern trading where the traders look for a trending market. When the price action pulls back enough and break the most recent higher high in an uptrend, it means the breakout happens, and any long trade will be highly appreciated.
Reversals – Reversal trading is also an effective way to trade the top and bottom of the market. In reversal trading, traders often look for the most recent higher low to break in an uptrend to take the selling trade. Conversely, the break of the most recent lower high is a signal to go long in an underlying asset. Breakout is the only way to catch the top and bottom in the market.
Fakeouts
A fakeout is a term used in a technical analysis which used to refer to a situation where the trader enters into a trade, but the signal never developed and the market immediately reverse against the trader. These are the most frustrating situations for the traders to deal with. Every newbie to the professionals face these kinds of situations in their trading, and it can cause a considerable amount of losses to the trader.
Most of the traders often wonder why these things happened with them. The primary causes behind these problems are the traders sometimes didn’t scan the market very well, or they didn’t focus on all the market variables. For example, sometimes news did this kind of unnecessary movements, so before entering in the trade always check is there any news coming up in the upcoming hours, if yes then ignore the trade and look for another opportunity.
Another thing does not add many indicators to your price chart, this thing will confuse you, and you will end up entering a trade way earlier. Make your charts clean and straightforward, and always use only one type of strategy to trade the market. The best way to avoid fakeouts is to fade the breakout. Fading the breakout means to wait for the price action to hold above or below the significant level then only activate the trade, do not make the mistake of entering in a trade when the price action breaks the major level, always wait for the confirmation first to avoid the unnecessary losses.
