A "breakout" is when the market suddenly and quickly jumps out of its recently established range to either gain, or lose, price dramatically. Often times a breakout will occur out of a counter-trend market, but this isn't always the case.
In fact, many of the articles you will find about breakouts online will actually be focusing only on breakouts that come out of a counter-trend market. While this is the most common type of breakout that trading systems concentrate on, the other breakouts should not be ignored because they also offer excellent opportunities for a trader to make good money.
When a market is counter-trending, traders are watching a market that is staying contained between a high and low range, but the market is moving sideways. When a day's trading ends up pushing the currency value out of that contained channel, that's a breakout to the upside, and it can go either way, higher or lower. No matter which direction it takes, there is money to be made off of it as long as you're on the right side of the breakout.
But breakouts aren't limited just to forming out
of counter-trend markets! They can also take place coming out of a trending market. When a market is trending in either direction, there still is a normal range that determines a trend. When the market breaks out beyond the normal range of the trend, that movement is also considered a breakout.
Breakout trading offers opportunity since jumping on the right side of a breakout early offers potential profit in a market. They provide a chance to ride a strong sudden surge of volatility to provide quick and large profits. While breakouts are rarer than other types of market movement, they offer the most money to be made.
This strategy sounds simple, but the problem with playing a breakout is that breakouts are technically unstable, and no one knows how long they will last or when they will suddenly reverse. There are also "false breakouts" where the market appears to be breaking, but isn't.
There are strategies and indicators that that try and pin point a potential breakout. Some of the most popular include:
1. Using pivot lows and pivot highs to determine potential "pivot points" that indicate an upcoming breakout
2. Fibonacci retracement methods
3. Using multiple moving averages
There are many methods to try and find a breakout, and once an identified breakout begins, a trailing stop is one of the best ways to take maximum advantage of this situation.
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