If you want to detect a trend reversal breakout, you can identify it through the MACD divergence signals. When you spot a potential breakout scenario on a currency pair chart, you should look at how the MACD histogram is performing.
You should look at the MACD histogram. Is it also forming higher peaks if the currency pair has been making new highs? You can safely assume that the uptrend is likely to continue if it is so. Any breakout to the downside will be short lived and probably false.
However, suppose the MACD histogram shows a bearish divergence. This is a strong signal that a downside breakout is more likely to be sustained than false. The reverse holds true for a bullish MACD divergence. In case of a bullish MACD divergence, the chances are high for an upside breakout.
However, MACD divergence signal seldom occurs. But you should immediately take note when it makes an appearance. It is a strong signal for a trend reversal. Another momentum indicator that can help you anticipate when the prices are at the verge of breaking out is the RSI. You can use both for confirming a trend reversal.
A reading of 70 and above indicates that the currency pair is overbought. A reading of 30 or lower indicates that the currency pair is oversold. RSI stands for the Relative Strength Index (RSI). The RSI measure the relative changes between the higher and lower closing prices over a period of time.
The most useful way of applying RSI is through its divergence signals just like that for MACD indicator. However, you must keep in mind; an uptrend could register a prolonged period of overbought conditions. Similarly, a downtrend could register a prolonged period of oversold conditions.
Like MACD, bullish divergence occurs when a currency pair declines to a new low but the RSI makes a higher low. A bearish divergence appears when the currency pair rallies to a new high but RSI makes a lower high instead.
Remember that it is very difficult to predict with 100% accuracy the success of a breakout. Using momentum indicators like MACD and RSI can sometimes provide clues to internal trend weaknesses since momentum proceeds price change for the breakout trading strategy.
Before implementing the breakout trading strategy, detail technical analysis of the current and past price action must be carried out in order to tilt the odds of success in your favor. Trading breakout can be a very profitable strategy if it is applied sensibly after thorough analysis.
Price breakouts may be triggered by sudden forex related news or comments or unexpected geopolitical events. Breakouts frequently occur along trendlines. A trendline breakout could signal a reversal or continuation of trend. In case of a trend continuation, this break may indicate a temporary interruption in the prevailing trend or signal that the trend will continue but at a slower pace.
Trading channel breakout is a very profitable strategy among the currency traders. A channel basically consists of two parallel trendlines which can be drawn to encapsulate the price action. You can view the price action taking place between the support and the resistance as forming a channel.
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