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
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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:
