Breakout trading is very effective. I confirm this based on my own experience. It is enough to look at the history of the movement of quotations for any trading instrument to be sure of some pattern. True, this word is not very applicable to the foreign exchange market, but nonetheless. Prices tend to move in a range limited by support and resistance levels. Their breakdown can be a good opportunity to open a trading position. But this tactic in trading has its own difficulties and peculiarities.
Today's article focuses on only one type of important levels. We will look at a breakout of the resistance level . When the price approaches it, the development of events can occur according to four possible options. First option: the price will bounce off the level and change its direction of movement to the opposite. Second option: the price will overcome the resistance level and continue to move up. The third option: the price will break the level, but then reverse and move in the same range. The fourth option: the price will break through the level, return to it and bounce off the level again. In this article, we look at the breakout of the resistance level. The problem is that it can be false, and then the open trade will become unprofitable.
How to determine a true breakout
In order to determine a false or true breakout, we see on the chart, I recommend using several criteria.
If the price has been near the resistance level for a long time and has not actually left this zone, then the probability that the breakout will be true is quite high.
The length of the candlestick bodies that form on the chart is important. If they are large and the shadows are small, then this increases the chances of a true breakout of the resistance level .
If the price tested the resistance level several times before the breakout, then, most likely, it will turn out to be true.
When evaluating breakdown, you should pay attention to volumes. If they grow, then this indicates its truth.
You also need to pay attention to the breakout candle. If it closed significantly above the broken level, then it is not recommended to enter the market. We must wait for the breakout confirmation. For this, the price must return to the level and rebound from it.
And finally, the last criterion. You should evaluate the combination of candlesticks that were formed during the breakout. If a reversal pattern appears on the chart, it is better to abandon the trade. The breakout is likely to be false.
To get skills in working with these criteria, use the history and trading on a demo account.