Understanding the Difference Between Breakouts and Momentum Indicators

Several traders prefer to use breakout points as a signal for their trend entries. On the other hand, others prefer to use indicators that show strong directional momentum.

Momentum Indicators

A variety of momentum indicators calculate price momentum, letting the indicator user to see at a glance if a specific currency pair is showing strong momentum long or short or chopping and ranging sideways with no momentum at all.

Technical analysts have developed a range of such indicators that are widely available for free on nearly every Trading Platform Trading Platform In the FX space, a currency trading platform is a software provided by brokers to their respective client base, garnering access as traders in the broader market. Most commonly, this reflects an online interface or mobile app, complete with tools for order processing.Every broker needs one or more trading platforms to accommodate the needs of different clients. Being the backbone of the company’s offering, a trading platform provides clients with quotes, a selection of instruments to trade, real In the FX space, a currency trading platform is a software provided by brokers to their respective client base, garnering access as traders in the broader market. Most commonly, this reflects an online interface or mobile app, complete with tools for order processing.Every broker needs one or more trading platforms to accommodate the needs of different clients. Being the backbone of the company’s offering, a trading platform provides clients with quotes, a selection of instruments to trade, real Read this Term.

The most popular are moving average crosses, the Relative Strength Index, MACD, Bollinger Bands, and Stochastics.

All these indicators look back over a determined time and calculate if the price movements have been more bullish or bearish. The internal formulas used by every indicator to calculate the indicated output are ideally similar.

Momentum traders often ignore support and resistance and check if momentum indicators show the price is more bullish or bearish on shorter and higher time frames.

If both types of time frames display momentums that agree, a trade in the prevailing momentum direction is taken.

One more approach possible to take - which can replace the use of indicators or complementary - is drawing key support and resistance levels and checking if they hold or break.

Breakouts

Another to achieve the same type of entry with strong momentum is to enter a long trade when the highest price recorded over a specific time is broken. This trend trading approach is very popular and time-honored.

In fact, the well-known Turtle Traders used an entry method based upon breakouts of 20 and 55 day high or low prices - as shown by the Donchian Channels indicator.

Moreover, this kind of approach is attractive because of how simple it is and consumes no time - a set and forget mechanical trade entry.

Many traders think that these types of crude mechanical strategies based on breakouts are too effortless and do not generate good results.

Many more fake outs exist in modern markets instead of successful breakouts, especially in Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term prices that tend to move in tighter ranger than commodities and stocks.

One crucial thing to keep in mind that could counter this perception is that precisely what constitutes a successful breakout is very much open to debate.

Most of the time, a stop loss of three multiples of the Average True Range is used in trend trading - also typically uses breakouts for entries. Also, using a stop loss, this wide will tend to produce more winners, but the winners' size becomes smaller if tighter stops had been used.

Key Takeaway

Breakouts have been well established for centuries that prices often move easier when they are in the blue sky (areas where the price has not been for quite some time).

Above all, it matters which precise entry strategy traders use if they go for the big moves such as 10:1. This shows that they tend to worry too much about entries, but the real challenge is to hold on for massive profits instead of being bothered by premature exits.