The types of breakouts in trading that you are looking for in the Forex market tend to fall into two categories. They are:
- Continuation breakouts
- Reversal breakouts
Understanding what type of breakout you are viewing in the market at any time is great way to capitalize on the movements that are taking place in the market.
The significance of a these types of breakouts in trading is that it signals that there has been a big change in the supply and demand dynamic in the particular market that you are trading in. Thus, you might want to perk up and pay attention to exactly what is going on in that market.
Types of Breakouts in Trading: Continuation Breakouts
There are times when buyers and sellers pause to figure out which steps they need to take next. When this happens, it is known as the period of consolidation. People also refer to this as a range bound market.
In a range-bound market you can see a breakout happen known as a continuation breakout. What this means is that the market was in a particular trend before it hit the period of consolidation and then continued that trend after the consolidation finally broke. This can happen in either an up market or a down market.
You may not be surprised to learn that reversal breakouts are essentially the opposite of what a continuation breakout is. In this case, the market is in a particular trend before it hits a period of consolidation. However, at the end of the period of consolidation, it breaks out in the opposite direction of where it was going before.
In other words, if the market was in a downtrend before hitting a period of consolidation, the market then breaks that consolidation and heads into an uptrend.
Always be cautious around trading when looking at breakouts, as it is completely possible that you may be viewing what is known as a false breakout. When this happens, the price will break through a certain level but then does not continue to move in that direction. All that you’ve seen is a short spike in trading in a certain direction before the trading resumes with a period of consolidation again.
In order to keep yourself safe, you should wait until the price retraces back to the original breakout level to see if it will continue on, or if you were viewing a false breakout. Trade with caution.