How to Detect Fakeouts
Breakouts are popular among forex
traders.
It makes sense right?
When price finally “breaks” out of
that support or resistance level, one would expect price to keep moving in the
same direction of the break. There must have been enough momentum building up
in order for price to have broken out of the level, right?
It’s time to hop aboard that train.
It’s all smooth sailing now. All you have to do is just wait for it…
Yes, wait for it…
"When you do what you fear most, then you can do
anything."
By Stephen Richards.
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"We may not be able to erase our past, but we can
always change our future."
By Dwayne ‘The Rock’ Johnson.
.
Relative Strength Index (RSI) (Part 2)
However, RSI is also good for seeing how long a trend has
been overbought or oversold. A common indication of whether a market is
overbought is if the RSI is above 70. On the flipside, a common indication of
whether a market is oversold is if the RSI is below 30.
Because trends are movements in the same direction for an
extended period of time, you will often see RSI move into overbought/oversold
territory, depending on the direction of the trend.
If a trend has produced oversold or overbought readings for
an extended period of time and begins to move back within the range of the RSI,
it is a good indication that the trend may be reversing.
"My pain may be the reason for somebody’s laugh. But my
laugh must never be the reason for somebody’s pain."
By Charlie Chaplin.
"I have learned over the years that when one’s mind is
made up, this diminishes fear."
By Rosa Parks.
Relative Strength Index (RSI)
RSI is another momentum indicator that is useful for
confirming reversal breakouts. Basically, this indicator tells us the changes
between higher and lower closing prices for a given period of time. We won’t go
into too much detail about it but if you would like to know more check out our
lesson on RSI.
RSI can be used in a similar way to MACD in that it also
produces divergences. By spotting these divergences, you can find possible
trend reversals.
"Do good and good will come to you."
By Billy Cox.
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Moving Average Convergence/Divergence (MACD) (Part 2)
So how can we use this when trying to spot a trend reversal?
Glad you asked!
Remember that trading signal we talked about earlier called
divergences and how it occurs when the price and indicators move in the
opposite direction? Since MACD shows us momentum it would make sense that
momentum would increase as the market makes a trend. However, if MACD begins to
decrease even when the trend is continuing, you can deduce that momentum is
decreasing and this trend could be close to an end.
You can see from the picture that as price was moving
higher, MACD was getting smaller. This meant that even as the price was still
trending, momentum was beginning to fade out. From this information, we can
conclude that a trend reversal is highly likely.
"A better life awaits those who are willing to focus
their mind on one phrase; I CAN DO IT."
By Steven Aitchison.
Moving Average
Convergence/Divergence (MACD)
By now you should have a good foundation
of the MACD indicator. If you don’t, you might want to check out our lesson on
MACD.
MACD is one of the most common
indicators used by forex traders and for good reason. It is simple yet
dependable and can help you find momentum, and in this case, the lack of
momentum!
MACD can be displayed in several
ways but one of the “sexiest” ways is to look at it as a histogram.
What this
histogram does is actually show the difference between the slow and fast MACD
line.
When the histogram gets bigger, it means momentum is getting stronger.
When the histogram gets smaller, it means momentum is getting weaker.
"Keep going. Everything you need will come to you at a
perfect time."
By Unknown Author.
How to Measure the Strength of a Breakout
As you learned earlier, when a trend moves for an extended
period of time and it starts to consolidate, one of two things could happen:
The price could continue in the same direction (continuation
breakout)
The price could reverse in the opposite direction (reversal
breakout)
Wouldn’t it be nice if there was a way to know to confirm a
breakout? If only there was a way to avoid fake outs…
Hmmm…
You guessed it…. THERE IS A WAY!
In fact, there are a couple of ways to tell whether or not a
trend seems to be nearing its demise and a reversal breakout is in order.
"I think people who have faults are a lot more
interesting than people who are perfect."
By Spike Lee .
"To achieve anything great in life, you must be willing
to make a sacrifice."
By Kelly Rowland.
Breaking down the Triangle Breakouts (Part 2)
Here’s a quick and disgusting memory tickler:
Ascending triangle = Forehead breakout
Descending triangle = Chin breakout
Symmetrical triangle = Forehead OR chin breakout
EWWWW!!!!
Gross eh? But we bet you’ll remember it!
"We should never give up hope. Everybody can have a
second chance."
By Lynn Whitfield.
