Understanding continuation and reversal breakouts
The main reason why a breakout happens is that there was a change in the currency pair's supply and demand while the trade is happening. As a trader, it is essential to look at every occasion as an opportunity to take home more profits.
Knowing the two main types of breakouts in forex
It is an essential move to know which breakout you are dealing with, mainly because you are trading them. Why? If you know which breakout you are trading, then you might have a more comprehensive view of what is happening in the market. We have two types, and they are continuation and reversal breakouts. These two types of breakouts are plain and simple to understand. Their names are pretty self-explanatory but let us talk about them more in detail as the lesson progresses.
First, we have the continuation breakouts.
Imagine this: you are working hard day and night 24/7 for the whole year to work on your career. Won't you feel the need to pause and take a breather? The same goes with the market and trading. When the move is happening for too long, the market will need a slight pause to breathe.
Buyers and sellers are in a dilemma where they do not know what to do next, so they want to pause for a while before making their next move. So, if we portray this in a chart, we will see a ranging movement. We can also call this occurrence a consolidation.
After this temporary consolidation, buyers and sellers will come up with a decision. If they made up their minds that they want to pursue the initial trend and want to continue pushing that price, we have a continuation breakout. Hence, it is named as continuation since traders continue the same and initial trend direction.
Next and lastly, we have reversal breakouts.
The first few phases of reversal breakout are like continuation breakouts. After an extensive period of a trend, buyers and sellers will need to pause to breathe and think about their next move. They got way too exhausted because the trend was too long. Unlike continuation breakouts, buyers and sellers believe that they made the wrong decision about the initial trend direction, so they now go against the trend direction. This occurrence is what we call the reversal breakout.
And then, there are false breakouts.
When you think that a reversal is happening or might be in the works, it turns out that they are just false breakouts. The price can get past a certain level, like a support or resistance level but do not continue that direction. Sometimes they are just short-term spikes or retracements. Retracements are like shorter versions of reversals where the price will move against the trend but end up going back in the initial trend direction.
Here is what we can do
Have a little more patience
and wait for the price to retrace back to the original breakout level. Wait
until you are sure that the price will go back to make a new high or low
depending on your trading direction. Also, do not get too excited. Stay calm
and collected when trading breakouts. Wait for the price to go in your preferred direction to
have more chances at profits. Yes, there might miss out on some trades, but you
will not have fake out risks.
