When you look at the Forex charts, one of the important things that you need to look for is patterns. There are some standard patterns like head and shoulders, breakout and retest etc. but you can also look for your own patterns that repeat themselves with the same results over and over again. The patterns seem to be the cause while the resulting price action after the pattern has been formed in the effect of the cause. With this mindset, you need to look for such patterns in the historical Forex charts so that when you come across such patterns in future (the cause), you can expect similar price action in the future as well (the effect). One such pattern is the breakout and
retest. The breakout will be generally through a resistance and it is usually preceded by a quiet period in the Forex market when nothing much seems to be happening.
In technical terms, this is called consolidation and breakout while in volume terms, it is called accumulation and the result of the accumulation is the up move or the breakout through the region of resistance. The size of the breakout is always directly proportional to the time of consolidation and inversely proportional to the price range during consolidation. In other words, the smaller the price range and the more time the price spends within the price range, the bigger the breakout. So how are such
breakouts traded? When the price is ranging, it can be noticed that the bottom of the range forms the support and the top of the range forms the resistance. When the Forex price is ranging, you will have no idea which way it is going to break. You don’t control the market and so the trader should not be trying to outguess the market. It would be wiser to just follow its lead. So, the best way would be to just draw lines between the high and low of the range and wait for the breakout. Once the breakout happens, you need to wait for the retest. The breakout would be very fast that you may not be able to get the right entry or the breakout may be false as well. 80-90% of all good, valid breakouts will retest the broken support or resistance. In order to make sure that the breakout is valid and also to ensure that you have a low risk entry, you need
to wait for the retest and it is at this point that you need to take the trade. Never trade the actual breakout, always trade only the retest.
Why does this breakout happen when there is seemingly no special news out there? During consolidation, the big traders, funds and banks keep buying the pair. They keep pushing the price up, using large buy orders, and down, by using much smaller sell orders to scare the smaller traders into selling so that the big traders can buy more. Once they have accumulated enough and there are no more sellers, they start pushing the price up and start buying everything in sight, seeing this breakout, others join in
as well. The price starts to accelerate in the direction of breakout and away we go.
This Forex trading strategy is very popular among Singapore Forex traders as well as traders from other parts of the world. All Singapore Forex brokers provide quality
and professional Forex charts that can be used for defining the price breakouts and apply this simple and effective trading strategy.
Article by tradinginsingapore.com
