Breakout strategy can be said as a tool that is very helpful in determining the starting point of opening a position even with the naked eye, so when you or I find a breakout signal it can be said that we are getting a golden opportunity to open a trading position and the potential to get PIP can be maximized.
From now on you must be familiar with chart patterns that indicate a breakout reversal signal such as:
- Double Top / Bottom
- Triple Top / Bottom
- Head Shoulders
If you don’t know about the reversal breakout signal above, please see the previous lesson, chart patterns.
In addition to some chart patterns above, there are still some indicators or tools used to determine a signal breakout. And that indicator is,
The easiest way to determine the breakout point is to draw trend lines in the price chart of the currency pair. To draw a trend line you can use at least two hills or valleys and then draw a line through the top or bottom points like the following picture.
Then how to use the trend line to determine the breakout position. So this is the story, when prices touch a line or trend lines there are only two possibilities. First the price will move towards the opposite (reversal) by penetrating the line and second, the price will continue its journey (continuation).
And when prices are able to penetrate the trend line, this is what is called the term breakout like the example below.
Breakout with downward movement can also be called the term breakdown.
And we need to say again that use a minimum of two indicators to determine a BUY or SELL signal such as when using trend lines that are pitted with MACD to determine the breakout signal.As seen on the chart, MACD also shows a strong bearish signal so that the decision that the price will breakdown will be stronger.
Previously we have discussed the channel, which is an indicator that is one step ahead of the trend lines because the channel indicator is an indicator that has two lines obtained from the line drawn between the top and bottom points as shown in the following figure,
How to use it the same when using trend lines only with the channel we can determine the breakout signal is easier because it has two trend lines. The possibility of moving prices also remains two, namely moving reversally or continuation.
Same when using trend lines we also need another indicator as confirmation and in this example we use MACD as a confirmation indicator which indicates that the price will move down (bearish) which is very strong.
Now this is the third way that is using the triangle chart pattern indicator which is formed when the market volatility is weak and the price consolidation starts to be more tight. And our goal of using a triangle chart pattern is the same as the previous indicator, which is to see a signal breakout and open a position until the volatility is weak again.
There are three kinds of triangle chart patterns, namely,
- Ascending Triangle
- Descending Triangle
- Symmetrical Triangle
This chart pattern is formed when there is a resistance level and the price in the market continues its movement to form Higher Low. And this shows that the Bullish will appear after a long Bearish market.
The story behind the formation of the Ascending Triangle pattern is that prices always form the highest price but because there are still many sellers (sellers), prices always come back down again (Higher Lows).
Besides that, there are some traders who believe that prices will continue to move even higher, and because prices start falling, the traders still buy at prices higher than the previous price. And what we will find is the fight between Mr. Bull and Mr. Bear in the forex market.
And what we will find is that the fight is won by Mr. Bull and the price breaks the triangle line and moves up (breakout) and because indeed the ascending triangle is a Bullish signal.
This pattern is basically opposite to the ascending triangle pattern. Seller traders press buyers’ buyers. And as a result we will see that prices form lower highs which will eventually meet with support levels as shown below,
Descending triangle is a Bearish signal so if you find this pattern then the opportunity to open a SELL position is very large. So when the price breaks the support level, the price will penetrate the support level and all we need to do is open the SELL position and ride the price movement until the volatility is weak.
The following is the third indicator, the symmetrical triangle which is formed when the support line is getting longer and the resistance is getting longer and decreases until it forms a symmetrical or equilateral triangle.
And unlike the two triangle patterns above, when a symmetrical triangle pattern is formed, we must be prepared that the breakout position can go up or down because this pattern is not a bullish or bearish pattern so there is no definite possibility.
The following are examples of GBPUSD currency movements that form a symmetrical triangle so that we must be prepared for whatever the possibilities. Will the price move up (bullish) or down (bearish).
To deal with something like this you can use a strategy to open two order positions. If one of the orders has been executed then the other order is immediately canceled or canceled.