If detected properly, breakouts can help option traders take advantage of the volatility. No trader will ever deny the importance of getting the right signals. They not only give them a favorable time to enter the right trade but also an opportunity to exit the wrong one.
Different Types of Breakouts
A breakout occurs when the price sets its course beyond the current resistance/support line. An authentic breakout never fails to provide helpful information to traders. In Forex trading, breakouts come in two major forms:
- Continuation breakouts
- Reversal breakouts
Being able to detect the right kind of breakout, anyone can understand what is happening underneath the surface. It gives traders the right indication about the gap between the demanded of volume and actual supply volume. That means who is on the dominant side of the market between the buyers and the sellers. Being a novice trader, chose the best options trading broker in UK so that you can even spot the gaps to earn money.
The gap can show some critical moves that can generate some pips earning opportunities. Let’s look in detail into two kinds of breakouts.
1. Continuation Breakouts
There will be times in your trading journey when you will see a prolonged move in a single direction. During such times, the market may often decide to take a break.
Such a situation sprouts because of the trader’s failure to reach a decision and decide which direction to follow. A time of range-bound path termed as consolidation will occur during this time. For some reason, if most traders decide to follow their initial decision, they will continue their push. It will end up being a continuation breakout.
As the name shows, it is a continuation signal of the current movement. It tells traders the trend will continue without being turned in any other direction.
2. Reversal Breakout
This type of breakouts kicks off like a normal continuation movement. It is quite typical to consolidate or to turn into a pause after a prolonged trend.
The only place where the movie deviates from the continuation is when the traders agree that the movement has got exhausted. At this point, they start to push the market to take the opposite path. It eventually turns into a reverse breakout. This may be called a reversal breakout.
This can happen in any direction. Depending on the direction they take after breaking the pause, they can be of two types.
- Bullish Breaks
In this case, the sellers achieve control of the market. They become so much stronger than they push the price beyond the resistance level. The pushing force becomes so strong that after breaking the resistance level, it doesn’t stop moving. It keeps moving higher and creates a bullish breakout.
Bullish breaks are blissful to traders as they are clean opportunities where a trader can earn some pips. All he needs is to place an order as early as they can detect such moves.
- Bearish Breaks
In this case, the buyers gain control of the market. They gain strength and push the price beyond its support line. The sellers lose all their energy at this level. Push given by the buyers makes the movement go downward. It crosses the support and doesn’t stop there. It keeps moving more downward and becomes a bearish break.
Traders should sell all their assets as soon as they get a proper signal of such a move.
3. False Breaks
Now we come to the fake outs. They happen and lead people to make the wrong move. So, they lose their capital and confronts big defeats. Many professionals mark false breaks as one of the prime reasons for people’s loss.
Pretend or false breaks happen when the price gets across a support/resistance and doesn’t accelerate further in that particular direction. It is the only reason why people need to wait for a little while to engage a trend even after it crosses a support/resistance line.