In this article, we will explain the breakout trading and reversal trading in terms of the price movement in Forex and Stock trading context. These information can be applicable to support and resistance, triangles, wedges, channels, rectangles, head and shoulders, cup and handle, and expanding ranges in Forex and Stock trading.
Breakout trading is a type of trading strategy that looks for levels or areas that a security has been unable to move beyond, and waits for it to move beyond those levels (as it could keep moving in that direction). When a price moves beyond one of these levels, it is called a breakout. On the other hand, reversal trading is a trading strategy that involves identifying a change in the direction of an asset’s price trend, from going up to going down, or vice versa. Traders try to get out of positions that are aligned with the trend prior to a reversal, or they will get out once they see the reversal underway. Reversals typically refer to large price changes, where the trend changes direction. Small counter-moves against the trend are called pullbacks or consolidations.
For breakout or reversal trading, many traders use technical analysis to identify these areas, often using trendlines or price patterns. These trader looks for patterns, for example, instances where the price of a security has been resistant to moving above or below a specific price level or price area. Then, the trader attempts to profit by entering a trade in the breakout direction, assuming that the price will continue to move in that direction. There are many different types of breakout patterns that breakout traders look for, including triangles, wedges, channels, rectangles, head and shoulders, cup and handle, and expanding ranges. Likewise, if the price does not have the momentum to penetrate the areas, then the traders tends to go for the reverasl trading strategy.
Let’s take the example of a support and resistance level to explain the reveral and breakout movement around the level. Price can make either a turning point (=Reversal) or breakout around the support level. The support level is the area where the market energy is converging before exploding. With this potentially high energy, the support line often serves as an efficient trading entry as well as an exit. If the bullish momentum is strong, then the price can make a turning point at the support line to move in the bullish direction. On the other hands, if price come down below the support line, it can trigger sell breakout. After sell breakout, the price can make a retracement towards the support line. However, if the strength of the breakout is high, then price can continue to the bearish trend.
Likewise, price can make either a turning point or breakout around the resistance level. The resistance level is the area where the market energy is converging before exploding. With this potentially high energy, the resistance line often serves as an efficient trading entry as well as an exit. If the bullish momentum is weak, then the price can make a turning point at the resistance line to show the declining momentum. On the other hands, if price move above the resistance line, it can trigger buy breakout. After buy breakout, the price can make a retracement towards the resistance line. However, if the strength of the breakout is high, then price can continue to the bullish trend.
Breakout Trading and Reversal Trading are the two main trading strategy for the day trading community in Forex and Stock market. It is even better if you can spot these trading opportunity from Fractal Wave patterns. They will often show much clearer entry and exit for your trading in comparison to the slow lagging technical indicators.
With Fractal Pattern Scanner, you can use both Breakout Trading and Reversal Trading. If you prefer breakout trading over the reversal trading, then you should use the Fractal Pattern Scanner to detect breakout patterns. If you prefer the reversal trading over the breakout trading, then you can use the Fractal Pattern Scanner to detect reversal pattern. Check the attached screenshot on how to switch from breakout trading to reversal trading and vice versa.
When you set Fractal Pattern Scanner to detect Breakout Pattern, it will detect the patterns at the low turning point probability. In the statistical sense, there is a good chance to have the turning point when the turning point probability is high. Hence, if we just reverse this logic, then we can tell that at low turning point probability, price can continue to move in the same direction as before. Hence, in the low turning point probability, we can often find good breakout trading opportunity. This is the core trading logic when you use Fractal Wave analysis in your breakout trading.
When you set Fractal Pattern Scanner to detect Reversal Pattern, it will detect the patterns at the high turning point probability. In the reversal pattern detection mode, the Fractal Pattern Scanner will try to detect the patterns that already run quite far in the same direction. Often the current price will be at the area of high turning point with multiple of ZigZag movement. With some knowledge in Fractal Wave analysis like Fibonacci Ratio, Harmonic Pattern or Elliott Wave pattern or X3 Price Pattern, you can spot the turning point more accurately.
With Fractal Pattern Scanner, just pick the best trading strategy works for you in between Breakout trading and reversal trading. Fractal Pattern Scanner can help you with both trading strategy.