Breakouts from Consolidation are the most common of setups that are traded in the Currency Market. These have been more dominant in recent years because of the extraordinary Monetary Policy stances of Central Banks as well as other factors that have led to low levels of liquidity. Breakouts can be fast and sharp, leading to trade targets being hit within minutes or a few days. However, as tempting as these are, there are many traps that have often caught traders with our pants down and left us with losses that appeared to come from nowhere- very embarrassing no? The best way to avoid these situations is to know which of the signals are to be traded and those that often lead to losses. Below are a few factors that need to be taken into consideration when making this distinction.
SIZE OF THE CANDLE
This is important because there are times a perfectly good looking Breakout Candle can be followed by a reversal that takes us back inside of the Consolidation, nursing losses along the way.
Part of the answer is that merely breaking beyond the boundary is not enough to provide a reliable signal. There are certain types of Candles that generally lead to loses and those that will usually lead to successful breakouts. The question therefore is which of these can be relied upon to provide us with the large trading gains we want?
BREAKOUT SETUP
After determining that Candle, we also have to ensure that the Setup/combination of Candles that led to that signal is strong enough to support the breakout. Weaker the setup, the weaker the breakout that will take place. This will often vary depending on the size of the Consolidation being broken.
Below are three types of setups/ways in which breakouts can take place.
2) and 3) can also take the shape of small Consolidations. Each of these 3 is more appropriate for certain types/sizes of Consolidations. Being able to match them up is another crucial step to identifying the correct breakout signals.
SIZE OF THE TREND WITHIN THE CONSOLIDATION
All Currency Pairs have their respective Daily, Weekly and Monthly Ranges. This means that once these Pip Ranges are hit, the market will begin to lose steam. At times, these exhausted trends coinicide with when a Consolidation Breakout Signal has been given. When they do, they are likely to lead to a pullback or at the very least a pause before resuming the breakout or reversing inside of the Consolidation.
This "rule" of the market is often ignored since our attention is focused more on the Pips that lie ahead rather than if the Breakout Signal is a "last gasp" before the market takes a breather. So even if the Signal itself is strong enough, it may lead to a False Breakout, confusing us even more.
These are just some of the major components that go into identifying profitable breakout setups and signals. Paying close attention to these and other factors and including them in your Trading Plan will make the big difference in your profitability over the Long-Run.
Happy Trading
Enjoy the Champions League Final
And of course.....
Visca Barsa, Visca Catalunya, Visca Xavi!!
SIZE OF THE CANDLE
This is important because there are times a perfectly good looking Breakout Candle can be followed by a reversal that takes us back inside of the Consolidation, nursing losses along the way.
Part of the answer is that merely breaking beyond the boundary is not enough to provide a reliable signal. There are certain types of Candles that generally lead to loses and those that will usually lead to successful breakouts. The question therefore is which of these can be relied upon to provide us with the large trading gains we want?
BREAKOUT SETUP
After determining that Candle, we also have to ensure that the Setup/combination of Candles that led to that signal is strong enough to support the breakout. Weaker the setup, the weaker the breakout that will take place. This will often vary depending on the size of the Consolidation being broken.
Below are three types of setups/ways in which breakouts can take place.
2) and 3) can also take the shape of small Consolidations. Each of these 3 is more appropriate for certain types/sizes of Consolidations. Being able to match them up is another crucial step to identifying the correct breakout signals.
SIZE OF THE TREND WITHIN THE CONSOLIDATION
All Currency Pairs have their respective Daily, Weekly and Monthly Ranges. This means that once these Pip Ranges are hit, the market will begin to lose steam. At times, these exhausted trends coinicide with when a Consolidation Breakout Signal has been given. When they do, they are likely to lead to a pullback or at the very least a pause before resuming the breakout or reversing inside of the Consolidation.
This "rule" of the market is often ignored since our attention is focused more on the Pips that lie ahead rather than if the Breakout Signal is a "last gasp" before the market takes a breather. So even if the Signal itself is strong enough, it may lead to a False Breakout, confusing us even more.
These are just some of the major components that go into identifying profitable breakout setups and signals. Paying close attention to these and other factors and including them in your Trading Plan will make the big difference in your profitability over the Long-Run.
Happy Trading
Enjoy the Champions League Final
And of course.....
Visca Barsa, Visca Catalunya, Visca Xavi!!
