If you are quite new in Forex trading, then it is the perfect time to learn some forex trading terminologies that you should understand to refine your trading strategies and increase your profitability in Forex Trading. In this article, we will discuss what “Breakouts” are, how to identify them, and how to act when you see one.
A breakout is a movement in price through an identified support and resistance, then followed by heavy volume and increased volatility. The most common reaction of the traders when the price breaks above the resistance level is to buy, and they do the opposite when it breaks below the level of support.
Practically, a breakout is a term used to refer to a situation where the price breaches above the level of resistance and goes higher, rather than breaching the level of support and going lower. Once the resistance level is breached, it is identified as the next level of support when the security experiences a pullback.
Most traders use chart patterns and other technical tools like for example, trendlines to pinpoint the securities that have the most possibility to break through a support/resistance level. To sum it all up, a breakout is the bullish counterpart of a “breakdown”.