Trading The Breakout (Part II)
A whipsaw breakout usually occurs when there is a lack of momentum or the breakout is small and weak. Whipsaw takes place when prices move out of a price range, then back into the price range and then breaks out of the level again, stopping both breakout traders and faders at least once.
Some times the price action is so choppy that it is better to stay out of the market. Breakouts all carry some risk of failure. Reasonably placed stops can help preserve your capital when the price breakout does not go your way.
Successful trading of a reversal breakout obviously means massive profits in the shortest possible time. However, things are not that simple as they seem on the surface. How do you know if a breakout is going to reverse the current trend?
You should look out for certain reversal chart patterns that tend to serve as harbingers of a trend change. Examples of such patterns include head and shoulder, double top/bottom, triple top/bottom etc. If you spot these chart formations in daily or weekly charts, there is a high chance that a reversal may be in the works.
Momentum indicators also known as oscillators are leading indicators. You can also make use of the momentum indicators to tell you if a trend is nearing its end in addition to looking for these chart patterns. They help in identifying a trend reversal before time.
Moving Average Convergence Divergence (MACD) is one of the simplest, yet most dependable indicators for a trader. MACD consists of three exponential moving averages (EMA). The MACD line is the difference between the 12 period EMA and 26 periods EMA. Usually a signal line consisting of 9 period EMA is plotted together with the MACD line.
When MACD line crosses above its signal line, a bullish signal is given. When the MACD line crosses below its signal line, a bearish signal occurs. A better visualization of the MACD is in the form of a histogram.
For example, the histogram should become bigger if the price move accelerates with an upside breakout as more and more buyers enter the rally to a higher level. The MACD histogram tracks the speed of the price action.
Each line becoming longer than the previous line as the speed of the price movement accelerates in a quick rally. Each line will become shorter than the previous line. When the price movement decelerates, the histogram will contract on the other hand.
When the currency pair rallies to a new high but the MACD histogram declines then a bearish divergence is formed. You can detect trend reversal breakout with the help of a MACD divergence signals. Read the next part of this article for more. - 23305
Some times the price action is so choppy that it is better to stay out of the market. Breakouts all carry some risk of failure. Reasonably placed stops can help preserve your capital when the price breakout does not go your way.
Successful trading of a reversal breakout obviously means massive profits in the shortest possible time. However, things are not that simple as they seem on the surface. How do you know if a breakout is going to reverse the current trend?
You should look out for certain reversal chart patterns that tend to serve as harbingers of a trend change. Examples of such patterns include head and shoulder, double top/bottom, triple top/bottom etc. If you spot these chart formations in daily or weekly charts, there is a high chance that a reversal may be in the works.
Momentum indicators also known as oscillators are leading indicators. You can also make use of the momentum indicators to tell you if a trend is nearing its end in addition to looking for these chart patterns. They help in identifying a trend reversal before time.
Moving Average Convergence Divergence (MACD) is one of the simplest, yet most dependable indicators for a trader. MACD consists of three exponential moving averages (EMA). The MACD line is the difference between the 12 period EMA and 26 periods EMA. Usually a signal line consisting of 9 period EMA is plotted together with the MACD line.
When MACD line crosses above its signal line, a bullish signal is given. When the MACD line crosses below its signal line, a bearish signal occurs. A better visualization of the MACD is in the form of a histogram.
For example, the histogram should become bigger if the price move accelerates with an upside breakout as more and more buyers enter the rally to a higher level. The MACD histogram tracks the speed of the price action.
Each line becoming longer than the previous line as the speed of the price movement accelerates in a quick rally. Each line will become shorter than the previous line. When the price movement decelerates, the histogram will contract on the other hand.
When the currency pair rallies to a new high but the MACD histogram declines then a bearish divergence is formed. You can detect trend reversal breakout with the help of a MACD divergence signals. Read the next part of this article for more. - 23305
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Discover a revolutionary new Forex Robot. Learn Forex Trading!
posted by Mr. Forex at
12:03 PM
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