Suppose you are enjoying a cricket match between your two favourite teams. One of the teams is currently on the verge of losing creating a huge run gap between the two. So, in that case, it is predictable to say that the team with lower run has the possibility of losing. However, after the sixth wicket fell, the seventh batsman came and played in a way to break the opponent’s formidable record. Now to your amaze, you saw that the losing team is now winning turning the tables. You can now say that the prediction that was made earlier was only a speculation based on the numbers and data. But there are always chances of breaking through the numbers and making a new road.
When you trade, there is also a similar situation when the movement of price breaks the predicted movement direction. We term them as ‘breakouts’ in trading. As a trader, you might have thorough research on the investment market and can speculate how the price may move. But you should also remember that speculation is merely a speculation and there is no guarantee that it will come 100% true. That’s why to spot a nice opportunity you should also remain careful about the breakouts. Breakouts are not always bad and can even create more scopes for the traders to make higher profits.
Now, what is a breakout?
A breakout is a condition when a price movement gets accelerated at a higher pace and eventually breaks out of a specific trend. Before the breakout take place, you will notice consolidation in the price. Those who absolutely new to the trading community should trade the breakout that favours the trend. By doing so, they can reduce the risk factor to a great extent and do better. But if you want to trade against the trend, you must keep the risk below 1% of your account balance.
As a trader, you may be aware of support and resistance where the price gets hit and moves in the opposite direction. These two price margins are very important as it gives traders a clear idea of when to enter and exit a trade. When there is a breakout in price movement, if it is in the upward direction, it means the price level has exceeded the resistance level. In that case, the resistance becomes the new support line banishing the old one. As a result, new support and resistance levels are formed.
There may also arise times when the price gets hit on the same place for several times. It indicates that the price is unusually strong and can overpower at any moment leading to a breakout in price movement. You can check here and get a demo account to study the breakout in the price. Never feel shy to use demo account as most skilled UK traders depends on it to revise their strategy.
Why do breakouts occur?
Breakouts can occur for many reasons and one of the most important is supply and demand. When the demand is unusually high, the price can go past the expected level causing a breakout. Again, when the supply is high, it indicates a decline in demand. That means the value of the financial instrument is decreasing and this decrease in value can sometimes decelerate to the point of a breakout.
Breakouts mainly happen on various price levels like support and resistance, time highs and lows, Fibonacci patterns, moving averages etc. But to identify the major breaks in the price level, the trader have to be skilled in analysing the important market details. Failing to analyse the important price metrics will results in big losses. Smart traders always emphasize on technical factors and then they relate the breakout with the news event. When the breakout is confirmed based on the technical and fundamental data, it becomes an easy task for the retail traders to earn more money.
How to make a profit on the breakouts?
As a trader, it is essential to use the breakouts to find high probability profit deals. Since breakouts often lead to a new trend and attempting to enter a trade at a breakout can be financially beneficial. When a breakout occurs, there’s a change in the support and the resistance and depending on your trade, you can make profits out of this breakout. Again, breakouts often lead to rapid price movement as many traders become interested to buy the shares due to the sudden increase in value. Thus it becomes a good opportunity for the traders to maximise their profit margin.
Breakouts often cannot declare that a trend is over and can reverse at any moment. So, to identify a breakout from the fake ones, the traders need to learn about the breakout zones and remain cautious about the potential breakout reversal.
Using price action signals
Choosing the right trading strategy is very important for breakout trading. If you want to push your skills to the next level, you must learn to deal with the price action trading signals. The experts relies on the reliable candlestick pattern to identify the major breakout. It allows them to take the trades with low risk and improves the profit potential to a great extent. Once you become skilled in analysing the price action signals, you will slowly become better in the trade execution process. But do not take more risk just because you are trading the breakout with the help of the price action trading strategy.
Elite traders knows risk management is one of the core element to ensure the survival at trading. If you want to change your life in short time, you must learn the details of the Forex market from the scratch. Never take too much risk just because you know the perfect way to trade breakout with the help of the candlestick patterns. Keep your risk profile low and you will slowly become skilled in analysing the important price patterns.