What is going on, in the market, while price penetrates resistance/support zone (breakout). In forex, former trading ranges often times creates resistances (areas of former supply) and supports (areas of former demand). To anticipate whether the price penetrates or bounces of the zone, we need to consider that crowd behaviour never changes.
Former resistance area (supply area according to VSA) signalises that lot of traders entered long at resistance price level, expecting price to penetrate it. However, price bounced to create resistance.
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Some of them might still be locked in the downward move of the price. The main new goal of those traders becomes simply to exit at smallest possible loss once the price rallies a little. Therefore, they represent potential resistance in upward price movement. Market maker are very well aware where can be those resistance zones found in the chart.
If market maker (smart money) want to surpass the resistance, they must pay the price by absorbing all the selling at relatively high price. Same applies for supports.
How will market maker surpass the support/resistance zone - create the breakout
To trade breakouts effectively, we need to understand its nature.
Price will move rapidly through the S/R zone, sometimes even gaping the price up/down, surpassing the S/R zone as quickly as possible. For proficient and educated forex trader, this becomes the clear signal of market strength in the direction of breakout.
Locked in traders that were hoping not to exit at substantial loss are suddenly in profit. This will most likely motivate them to not exit their long positions yet.
This true breakout is relatively well know forex phenomenon, that can be found on any timeframe and any currency pair. There is also a lot of forex strategies that are employing this smart money making manoeuvre.
Ultra wide candle, penetrating resistance on high volume is very clear sign of market strength in the direction of breakout. And what is more important, that there is a strength in the instruments background prompting market makers to be prepared to absorb any selling on resistance, buying in support.
True breakout makes relatively easy to see, that smart money are expecting price to continue trending. What is also important, is that forex traders at different positions also noticed the breakout move and will be also looking to enter long, what will further support the new up trend continuation. And vice versa for downtrend.
How to trade breakout in forex
Realise that supports and resistance are zones, not levels. Draw them as such and expect breakout surpassing the zone, not just a single line.
Consider volumes: True breakout can be distinguished by increased volume (volumes forex indicator) on breakout candle. Fakeouts are often marked by low volume - signalising general uninterested of smart money in its continuation. Fakeouts can be effectively traded if we expect breakout to opposite direction and they offer great risk reward ratio.
Recognise breakout candle: Stronger the breakout candle, stronger and more reliable the breakout. As we mentioned purpose of breakout is to move price quickly and far through S/R zone. We enter the trade in the direction of breakout on candle close. Recognising candle patterns as the price approaches S/R is also very helpful.
Recognise forex chart pattern: some forex formations can drastically increase success rate for breakouts in the direction of the trend. Other can kill your trading with fakeouts. Learn to recognise them.
Check out some breakout forex strategies. And also some fakeout strategies.
