Types of breakouts in the forex market

In this lesson, we will discuss the most important types of price breakouts in the forex market.

1. Continuation breakouts

These are types of breakouts that occur when currency prices have been in a consolidation and later continue in its initial trend direction after the break out.

When traders/ investors are not yet confident of their decision, they tend to hold currency or their assets for sometime until they get convinced to continue to trade in the same direction of  the market.

This indecision is what causes congestions and consolidations in the forex market.

Let;s look at an example below on the NZDUSD, Hourly chart

From our chart above, you can see we had, a previous uptrend, congestion inform of a wedge then the ultimate break out. Now that’s a continuation breakout. They buy entry is just when the candle closes above  the trendline.

2. Reversal breakouts

 They tend to appear after the exhaustion of the trend/trend climax . This is when the currency has moved in one direction for a long time and has been overbought or oversold. A reversal break out leads to change in the direction of the trend after the break out.

Take a look at the NZDCHF, 4-Hour chart below;

Looking at our chart above, price was in an extended downtrend, then we had a channel congestion. The price broke through the resistance level, so this was a warning for a likely change in direction of the trend. That’s why it is called a reversal break out.

The buy signal confirmation is a the candle close above resistance level.

3. False breakout

This happens when price breaks out the defined levels of support and resistance for a short time and does not continue but moves back to the opposite direction. These are some of the traders’ nightmares.

Take a look at the EURCHF, 4-Hour chart below;

From the chart above, we had a breakout below support and then price reversed back hitting any set stops.  This is so frustrating especially for traders who don’t use any risk management plan.

False break outs can be avoided by letting price to first retest back the broken levels to get a clear confirmation for your entry. Yes, sometimes you may miss some trades but it protects you from many false break outs.

Let’s look at an example below on the EURCHF, 4-Hour chart.

From our chart above, we had breakouts of the price above the trend line. So what you do, is to wait for a retest as shown above. This is your confirmation for the entry signal, in this case, it was a a buy.

 

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