Trade Breakouts Using Trend Lines, Channels and Triangles
The nice thing about breakout trading in forex is that opportunities are pretty easy to spot with the naked eye. You need to know what tools to use.
Here are just a few Chart Patterns:
- Double Top/Bottom
- Head and Shoulders
- Triple Top/Bottom.
The first way to spot a possible breakout is to draw trend lines on a chart. To draw a trend line, look at a chart and draw a line that goes with the current trend. Connecting at least two tops or bottoms when drawing trend lines is best. The more tops or bottoms that connect, the stronger the trend line. So, how can you use trend lines to your advantage? When the price approaches your trend line, only two things can happen.
1. The price could either bounce off the trend line or continue the trend.
2. The price could break through the trend line and cause a reversal.
We want to take advantage of that breakout!
Another way to spot breakout opportunities is to draw trend channels. Drawing trend channels is almost the same as drawing trend lines, except that you have to add the other side after you draw a trend line. Channels are helpful because you can spot breakouts in either trend direction. The approach is similar to trend lines in that we wait for the price to reach one of the channel lines and look at the indicators to help us decide.
Example: The MACD showed strong bearish momentum as EUR/USD broke below the lower line of the trend channel. This would’ve been a good sign to go short!
The third way you can spot breakout opportunities is by looking for triangles. Triangles are formed when the market price becomes volatile and consolidates into a tight range. Our goal is to position ourselves when the market consolidates so that we can capture a move when a breakout occurs.
Here are the three types of triangles:
1. Ascending triangle
2. Descending triangle
3. Symmetrical triangle
Ascending triangles usually break out to the upside. So, when you think of ascending triangles, think of breaking out on your forehead.
Descending triangles usually break out to the downside. So, when you think of descending triangles, think of breaking out on your chin.
Symmetrical triangles can break either to the upside or the downside. So, when you think of symmetrical triangles, think of breaking out on both your chin and forehead.