How to Measure Breakout Strength

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How to Measure Breakout Strength

Strength of Breakout, before you already know whether it’s trading with a breakout strategy and indicators that can be used to detect it. Likewise, you already know that prices in a certain period experience consolidation, so there are two possibilities that:
  1. Prices will move in reverse direction ( reversal breakout )
  2. The price will move to continue the previous movement ( continuation breakout )
There are several ways to determine the strength of the breakout so that we will not open a position in a misdirected condition.

Moving Average Convergence / Divergence (MACD)

For now you have to understand what MACD is if you don’t understand what MACD is, please see the explanation beforehand 🙂
Just remind you that MACD is one type of momentum tool that is very reliable and widely used by most forex traders to determine the exact timing or momentum of executing trading orders.
And MACD can be displayed in various forms and one of the most common forms is the form of a histogram with the fast and low type MACD lines accompanying it. When the histogram is in a larger shape, it shows a very high momentum and vice versa, when the histogram is small, the momentum is low.
Now the question is how to use MACD to find out if prices will experience a breakout?
Keep in mind that the indicator we are using is a type of divergence or difference and how it is formed is when price movements and indicators move in the opposite direction. And because MACD shows a momentum, it can be said that momentum will increase when the market is making a trend. Even if the MACD starts to decrease momentum when the trend is continuing its movement, you can conclude that the momentum is decreasing and this trend is coming to an end.
You can see the picture above clearly even though the price continues to move higher and higher but the MACD histogram that forms is getting lower. This means that even though prices are forming a trend but momentum is slowly disappearing. And from this movement we can conclude that the price will very likely soon be reversed .

Relative Strength Index (RSI)

It is a momentum indicator that is very useful as a means of confirmation of a breakout reversal.Basically this indicator shows us about the highest closing price changes with the lowest in a certain period. If you want to know more details about how to use this indicator, please visit the previous article, how to use the RSI indicator.

RSI can be used as we use the MACD indicator to produce a divergence or difference. By finding a divergence, we are likely to find a trend reversal. And the principle of divergence or the difference between price movements and indicators is shown by the following figure.

However, RSI is a good tool to use to determine whether the market is overbought or oversold. A general indication that the market is overbought is when the RSI is above 70 and said that the market is oversold if the RSI is worth under 30.

Because the trend moves in the direction of time, the RSI will move into oversold or overbought areas and depends on the direction of price movements.

If a trend has resulted in an oversold or overbought market within a certain period and then starts to enter the RSI range (between overbought and oversold limits) then this is a good opportunity because a trend reversal is imminent.

Based on the data in the picture above that the price is in the overbough area (RSI> 70) and when the price returns to the RSI range then this is a golden opportunity that the price will reverse the previous uptrend.

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