When trading intraday breakouts, or when engaging in any type of trading for that matter, it is important for the trader to use every type of advantage possible. In all forms of trading, no matter if the vehicle is the equity, futures, or the forex market, there are many instances of false breakouts. In order to reduce the negative effects of these events, let-s take a closer look at intraday breakouts and how to trade them.
Triangles before breakouts:
Ascending and descending triangles create excellent breakout patterns, because the pattern itself establishes a directional bias for the trade. An ascending triangle is formed by a combination of diagonal support and horizontal resistance; a descending triangle is formed by a combination of diagonal resistance and horizontal support. In the case of an ascending triangle, the bulls are gaining strength and buying at higher and higher levels, while the bears are merely trying to defend an established level of resistance. In the case of a descending triangle, the bears are gaining strength and selling at lower and lower levels, while the bulls are merely trying to defend an established level of support.
When trading ascending or descending triangles, the trader can gain an edge by looking to the direction of the currency pair prior to the formation of the triangle pattern. Ideally, we search for situations where the triangle and the prior trend are in agreement, directionally speaking. This is because it is not unusual for currency pair to trend, then consolidate, and then resume trending. The directional bias of a triangle is to break the horizontal support or resistance, and if the pair was trending in the same direction prior to the formation of the pattern, the trade becomes all the more compelling.
For example, on the hourly chart of the EURUSD pair, we see the formation of a descending triangle.
Figure 1: A descending triangle on the hourly EUR/USD chart.
Figure 2: Descending triangle harmonizes with the prior downtrend.
Time of day & volume:
Another edge that we can put to use when trading intraday breakouts is the time of day. Perhaps you are familiar with the trading axiom that a breakout is considered significant if it occurs on high volume, and is considered less significant if it occurs on low volume. While forex traders are not able to easily access accurate volume figures, we do know that trading is not equally liquid at all time of the day, and there are certainly times of day that generate more volume than others. Let-s take a closer look at the forex trading day to see how we can use this to our advantage.
A closer look:
Now that we have a greater understanding of the forex market-s liquidity as it relates to various times of day, let-s see how this can affect our trading. Just like an equity trader, I-ll assume that a breakout that occurs at a time of high volume is legitimate, and a breakout that occurs at a time of low volume is suspect.
Figure 3: False breakout below support on EUR/USD.
Figure 4: A true breakout below support.
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