Lesson 2: How to Spot Breakout Trends in the Forex Market

Trading the trend breakout is one of the most common and profitable strategies in online trading. But here's the question: can you trade and profit from the trend breakout if you can't spot it? 

Well, you absolutely can't. Don't sweat if you're unfamiliar with identifying breakout trends. In this lesson, you can explore effective tools and ways of spotting potential breakout trends. 

Lesson Highlights

• The two primary breakout trends are the continuation breakout and reversal breakout. A continuation breakout happens when the market breaks out of its support and resistance level by following its primary trend. Meanwhile, a reversal breakout occurs when the market breaks out of its support resistance level after a reversal.
• A trader must use technical indicators like trend lines, channels, and triangles to spot a market breakout.

Overview of Breakout Trend 

One of the core concepts of the forex market is riding the market trend.  

When you trade forex, you engage in trend trading, aiming to enter the market based on the primary trend. By market trend, it describes either of these market environments;  

1. Bullish trend: The market is trending upward because of the high demand for security 
2. Bearish trend: The market moves downward because of low demand for the security 
3. Price consolidation: The market is at its breathing or resting stage, where the price simply bounces off a certain market range or level.  

But as you already know, the forex market is very volatile. With volatility, the forex market never trends in a stable direction; you should expect it to change trends every time. That is called a breakout trend, or simply when the market breaks out from its primary trend. 

Breakout trends are commonly classified into two categories: 

• Continuation Breakout: The market enters a consolidation period and continues its previous primary trend.  
• Reversal Breakout: The market also enters a consolidation period but then moves in the opposite direction from its previous trend.  

By using these breakout trends, you are ahead of the new market trends and able to capitalize on the trend. Also, identifying trends can help you manage market risk because you know how the market will move in the future.  

Here's the good news: breakouts are easy to spot with the naked eye. Simply look for the market signs, draw the trend lines, and you'll have the potential breakout at your fingertips.  

Ways To Spotting Breakout Trends 

Okay, so how do you spot breakout trends?  

We all know that using and looking at the price chart is a LOT. So, what more when you're identifying breakout trends? 

Here are the tools you should only focus on and how to use them to identify breakout trends.  

Method 1. Using Trend Lines 

The first method to identify breakout trends is drawing trend lines.  

To draw a trend line, you simply look at the price chart and draw a line that goes with the current trend. Remember, always connect the bottom to another bottom or top to another top. It should never be top to bottom or vice versa.  

Also, the drawing of trend lines is not limited to only two points. The more points you've connected, the stronger the trend line is.  

But how can you use the trend lines to your advantage? When the price is nearing your drawn trend line, two things might happen;  

1. The price may bounce off the trend line and continue the primary trend, which shows a continuation breakout.  
2. The price bounces off within a certain range and then moves in the opposite direction of the previous primary trend, showing a reversal breakout. 

With these potential movements, you can position your trade properly to ride and profit from the breakout. Also, you can use these breakouts to shield your position from market risks. 

Method 2. Using Trend Channels 

Drawing trend channels is another way to identify potential breakout trends. However, this method is often overlooked because many traders don't know its existence. 

Well, I'll introduce you first to the channel lines in technical analysis.  

In its most basic form, channel trend is a pair of parallel trend lines. This happens when the price of an asset is moving between two parallel trendlines. When you draw a channel trend, you simply connect the swing highs of the price while also connecting the swing lows.  

As you may notice, it's like a simple trend line. However, you factor in both the swing highs and swing lows when you draw when you analyze the channel line.  

Identifying breakout trends using the channel line is beneficial in the sense that you have references for spotting breakouts in both directions of the trend. When doing so, you wait for the price to approach your channel line to figure out the breakout direction of the market and properly set your entry point.  

Method 3. Using Triangles 

The last method you can use when identifying a breakout is by looking at triangles.  

As the name suggests, the triangle is a market pattern that shows a triangle-shaped trend line. This market pattern is effective in identifying trends and foreseeing future market performances.  

How does this form? A triangle happens when the trading range of the currency pair becomes narrow, basically making a triangular or pointy trend pattern.  

To draw this, you simply connect the highs to trace the upper trendline and do the same to the lows for the lower trendline.  

So, you've learned the importance of breakouts when you're trading forex and the best ways to identify these breakouts.