The breakout strategy is a component of group of techniques classed as technical analysis. A breakout happens when the price of a financial security like a currency pair or a stock index moves up or down after a period of consolidation. Causes of breakouts are often major news events, or when the worth breaches a support or resistance level.
The first way of using the breakout strategy is to use channels. A channel is period during which a financial asset trades within a narrow diagonal or horizontal trend. You can easily see when the channel is being formed. Alternatively, you can draw two lines, joining the upper and lower extreme points of the chart.
Another way to identify breakouts is to watch a triangle pattern. As the name suggests, this is often when the buyers and sellers aren’t fully committed on the direction the worth should move. This results in the formation of a triangle pattern. This pattern tends to happen before a serious news release like the Fed interest rates decision. When the pair reaches the apex, the price tends to breakout in either direction.
The first thanks to spot a possible breakout is to draw trend lines on a chart. To draw a trend line, you simply look at a chart and draw a line that goes with the current trend. When drawing trend lines it is best if you can connect at least two tops or bottoms together. The more tops or bottoms that connect, the stronger the trend line. The price could either bounce off the line and continue the trend. The price could breakout through the line and cause a reversal.