Price Action Breakouts explained by professional Forex trading experts the “ Price Action Breakouts” FX trading team.
Price Action Breakouts?
Price action traders feel that everything that is needed to analyze markets is available directly from the price chart, including a mechanism with which to enter into strong moves AS they begin.
What is this mechanism?
The mechanism is simply price itself.
After our last article investigating swing-highs and swing-lows, we can now look for areas of support and resistance as substantiated by the market.
For instance, on the chart below, notice the up-trend in the AUD/USD currency pair as price approaches the vaulted ‘parity,’ value.
As a side-note, parity is often considered a form of ‘psychological,’ resistance as it is an even, whole number. When placing orders, as matter of natural human behavior, many traders will look to round numbers for setting of stops or limits.
This can greatly alter price action, as up-trends can be slowed by the selling that ensues with a litany of stops hit at a pre-determined price. We will investigate psychological support and resistance in a future price action piece, but for now, let’s just consider that this could be a form of resistance.
As price crosses this ‘psychological,’ level of parity, notice the sell-off that ensues. This can be predicated by limit orders that traders have placed on long positions. Once this 1.00 even level has been hit, an onslaught of sell orders come as those limits execute.
On the other end of the trade, we have short-sellers that have placed stops at that nice, round, even value of 1.0000. Once price hits parity, those stops get triggered, further exacerbating the selling that is taking place.
This brings on an entire change in momentum; as you can notice the trend-line that had supported the pairs’ bullishness on the run-up gets broken; and then price action heads lower.
The astute trader could take a step back and imagine:
The pair previously had a lot of bullishness (which is why price had run up to parity in the first place). The turn-around at 1.0000 even may have been brought on from protective stop or limit orders. If price moves up to that level again (with strength) it may break this resistance and just continue running.
This is the breakout trade. Taking these major levels of support and/or resistance and opening positions with the prevailing momentum at the time.
But what if support or resistance is far away from any psychological levels?
That’s ok, we can grade support and resistance in a variety of ways; not just with psychological levels.
For instance, in the below chart, we’ve taken a snapshot of the AUD/USD currency pair. As price runs up to .9876, we seem to hit an area of resistance. This can be identified by the fact that price wicks up to .9876 and is met by selling.
Price Action Breakouts Conclusion
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