In today forex faq, we have one interested question from one of our fellow traders regarding how to trade the breakout of the market.
Below is the question:
Is it wise to trade when the exchange rate (price) is in a consolidating phase with ups and downs of about 30 pips?
My problem is that I do not know when the price breaks out even when the bollinger lines are widening.
For your first question, it really depends on what strategy you are using. If you are a range trader using the range strategy that I share with you before in this blog, it is definitely okay to trade.
When the market is in consolidation, you can also use the scalping strategy to trade the repulsion of the price causing them to move within a channel.
However if you are using other strategy like the trend or breakout strategy, then you should wait for a breakout to occur before you enter a trade. One thing you need to know is that there are trading opportunity on any kind of market condition. It is just that you need to pick the right strategy for the right market in order to make money from it.
As for your second question regarding how to know that a breakout has occur besides seeing the bollinger bands widening. I will suggest you to use the trend line. In fact, I have received question from readers asking me how to draw a proper trend line.
Therefore I will take this opportunity to show you how to do it correctly. To draw a trend line, you will first have to identify the most recent few swing highs and lows.
If you are drawing the support trend line, you will connect as many swing lows as possible. Do note that the more swing lows that you manage to connect, the stronger is that trend line.
If you are drawing the resistance trend line, you will need to connect as many swing highs as possible.
Now that you know how to draw a trend line, I shall go through with you how to trade the breakout using a combination of trend line and bollinger bands.
From the picture below, you can see that the price is currently in consolidation. So I drew a trend line at the most recent point and you can see that the price actually broke through it.
However this is not a breakout trade as the trend line break does not comes together with a widening of Bollinger Bands. So what I will do is to draw another trend line when the price moves higher than the highest swing high on the picture above.
From the picture below, you can see that the price actually moves higher and therefore I draw a new trend line. You can see that the price actually broke the trend line and at the same time, the Bollinger Bands started to widen and this gives us a good entry point.
From the picture below, you can see the amount of profit made from this trade using this technique.
I hope that I have answered your question and for those of you who has something to share with us regarding this question, do feel free to give your comment below.