Trading Breakouts
Breakouts occurs when a specific price level is broken such as Daily Pivot Points, Support and Resistance, Fibonacci levels, etc.
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When trading breakouts, our goal is to enter when the price breaks out and then hold the trade until the volatility decreases and the trend dies.
What is volatility?
Volatility is known as the statistical measure of the percentage of returns or movement for any given forex pair, market index, stock, etc. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.
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So what does that mean? essentially volatility is just a measure of the price movements over a certain time period for any forex pair, stock, security, etc.
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The volatility of a forex pair is something we can use when searching for a breakout trade opportunity.
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There are two indicators that we use in our trading to measure volatility; Bollinger Bands and ATR.
Bollinger Bands
The Bollinger Bands Indicator is an excellent tool for measuring volatility.
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This indicator is essentially just two lines plotted 2 standard deviations above and below a moving average of X period.
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ATR (Average True Range)
The ATR is also a great tool for measuring volatility as it shows you the average trading range of the forex pair for the given X period.
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For example, if you set the period of the ATR indicator to “40” on a daily chart, the indicator would display the average trading range for the past 40 days of price data.
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When the value of the ATR is falling then volatility is decreasing.
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If the value of the indicator is rising then volatility in increasing.
How to trade Breakouts
When we trade breakouts in the forex market, there are two main types:
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Continuation breakouts
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Reversal breakouts
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Continuation breakouts happen when price moves in a trend, then takes a break by consolidating in a range and then breaks out of the consolidation and continues the trend. Its important to watch the volatility level using one of the previously mentioned indicators to confirm the breakout, we want to see higher volatility on the breakout and a candle to close outside of the consolidation zone.
A Reversal Breakout occurs when when price consolidates in a trend and then breaks out of the consolidation zone in the opposite direction of the the current trend, this is known as the reversal.
As we mentioned before its important to observe the volatility when trading breakouts, true breakouts happen on above average volatility.