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3 Forex Indicators to Help You Confirm a Breakout
Forex traders bring all kinds of strategies and trading timelines to the table when they analyze forex charts. Both chart patterns and forex indicators can be used to evaluate trade opportunities depending on both your personal trading preferences and the price activity taking place on the forex charts.To get more news about WikiFX, you can visit wikifx.com official website.
When it comes to identifying a price breakout, though, technical indicators can help you determine not only the start of a breakout event, but also the kind of momentum it might carry for traders who open a position at the start of this movement.
Before we discuss the top technical indicators for confirming forex breakouts, though, lets make sure we understand how breakouts start.
Lines of resistance and support provide a reliable framework for understanding price movements and analyzing potential trading opportunities. In forex trading, currency pairs typically see price movements that stay within a fixed range, with price extensions and retracements often corresponding to well-known Fibonacci levels.
When the price moves beyond that line of resistance, it represents a breakout—and many traders will be eager to capitalize on this price action. A breakout is a departure from range-bound price movements and can be caused by a number of factors. Whats important to traders, though, is identifying these breakouts when they occur and realizing the difference between a false alarm and a true breakout that offers profit potential.
To make sense of these price movements and identify lucrative trading opportunities, most traders turn to forex indicators that can help them evaluate the likely strength of a breakout, which, in turn, represents a greater reward for the risk traders take on when opening a position. Here are three widely used forex indicators that can help you confirm a price breakout.Moving average convergence/divergence (MACD) is a popular tool for evaluating price changes that take place quickly, which helps traders understand the momentum behind a breakout. Through the use of a histogram, traders can see the speed of price changes as price movements approach a line of resistance and break above. With MACD, studious traders can even spot likely breakouts before the price touches the line of resistance based on the rate of the acceleration for the currency pair.
In addition to helping spot a price breakout, MACD can also help traders figure out when to close their position based on slowing momentum, which may indicate an oncoming price reversal. As the histogram used to track momentum starts to plateau or even indicates a reversal, traders should consider placing a stop-loss order or closing out their position altogether to maximize their earnings through this swing in momentum.
In the NZD/USD chart below, a steep price decline in mid-to-late March is followed by a MACD line movement above the signal line, signaling a buy opportunity. This move coincides with a break above the zero line, adding even more strength to this indicators buy recommendation: The multiple data points incorporated into MACD makes it a more expansive technical indicator than some alternatives. You can also customize this indicator to calculate MACD on shorter timelines if youre trading in shorter time frames, such as day trading. This can improve the value of MACD in cases where the default calculations are too broad to be consistently relevant.
Bollinger Bands are composed of three lines: the 20-day simple moving average (SMA) and parallel lines that represent two standard deviations in either direction from the SMA. Traders use these outer bands to identify price extremes that are likely to lead to a reversal breakout. When the price moves outside of either of these outer bands, it is regarded as an extreme price position that is likely to trigger a reversal breakout.
Traders can use Bollinger Bands by simply opening a position on a currency pair whenever the price crosses one of these bands. To gauge the possible momentum for this breakout, you might consider using MACD or the relative strength index (RSI) in conjunction with Bollinger Bands.
Look at the NZD/USD chart below. Near the same time frame where we saw the MACD line cross the signal line, the currency pairs price breaks out of the lower Bollinger Band, signaling a buy opportunity before quickly moving back within the bands: |
