This article is about trading foreign exchange breakouts and how you should go about it.
In the foreign exchange trading market a breakout happens when the price breaks out of a trading range or consolidation. A breakout may occur when a specified price level is broken such as Fibonacci levels, pivot points, support and resistance levels, among others. When trading breakouts, your goal is to enter a trade when the price breaks out and continue in the trade until the volatility subsides.
Unlike the stock or futures market, it is not possible to view the trade volumes in the foreign exchange market. With future and stock trades, volume is vital if you intend making breakout trades. This makes it extremely difficult because trade volume data is not available.
Due to this disadvantage in the forex market, you have to depend on risk management, as well as other criteria to be in the right position for a good breakout. Volatility would be considered to be high if there is a huge movement in a short time. If there is very little movement in a short time period, volatility can be considered to be low.
It may be tempting to enter the market when there is a lot of movement, you may find that you become anxious and stressed. This will prompt you to make unsound decisions as you may show a profit, followed by a quick loss. High volatility in the market is what is attractive to traders, but it is often their downfall. You have to use this volatility to your best advantage.
Instead of following the crowd and jumping in when there is high volatility, you should find a currency pair that has low volatility. This will give you the opportunity to prepare for when there is a breakout and volatility goes sky high.
Measuring Volatility in Foreign Exchange
When you are searching for good breakout opportunities, you need volatility. Volatility is a way of measuring overall price movements over a specific time period. You can make use of that information to detect possible breakouts.
There are certain indicators that could aid you in measuring the current volatility of a currency pair which, in turn, will help you if you are searching for a breakout advantage.
Bollinger bands are perfect for this purpose as it was designed to measure volatility. Bollinger bands made up of two lines that you plot two deviations below and above a moving average. This is determined for a specified time period. You determine the time period. If you set it at 15, you would have a standard moving average of 15 along with two alternate lines. One line would be placed plus two deviations above the SMA and the other would be minus two deviations below. If the bands shorten, volatility is low. If the bands widen, volatility is high.
Average True Range
Average true range is ideal for measuring volatility because it indicates the average market trading range for a specified time period.
This is one of the most common indicators used by many traders. It is a simple tool which provides you with invaluable information. Moving averages takes a measurement of the average market movement for a specified amount of time. The amount of time is determined by you.
You can trade foreign exchange breakouts, but you need to understand the charts and indicators to do it effectively.
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