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3 Forex Indicators to Help You Confirm a Breakout

    • 2643 posts
    April 13, 2021 3:14 AM EDT
    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: