Breakdown of the level
- Analyst AZA
Breakdown of the level in the forex market
When learning the Forex currency market, many beginning traders of the market get acquainted with such term as breakdown. Strategy on breakdowns is effective and popular among the players of the exchange. But what is a breakdown and how to use it correctly in forex trading?
The breakdown of a level is the overcoming of the price of a fixed limit, i. Border, for future appreciation of the exchange rate or, conversely, its decline.
Near the border, earlier, the price was reversed, but then a breakdown occurs, and the currency instrument follows. As for the levels, the following levels are distinguished:
1) support and resistance lines;
2) important or historical points on the graph. When they reach them, the price turns in the opposite direction.
Lines of support and resistance, are built on certain points of the highs and lows of the price, which have a value: they limit the price corridor (zone for the movement of the exchange rate). The price corridor moves ambiguously, then reaching the upper limit, then falling.
Basis points are important because they are a kind of psychological barrier that simply does not allow the price to go further. For example, the value of quotations of 1,000 or 1,5000 will be difficult to overcome, but in case there was a breakdown, the course will follow the direction of the breakdown.
Historical levels are those that can be determined by carrying out a technical analysis of the market, exploring past time intervals. If, for example, the rate of the EUR / USD pair did not rise above the mark of 1.2500, then we can use this point as a historical indicator.
The breakdown will be present if the price is not just a fixed value but will continue its movement further.
The breakdown is both true and false.
A true breakthrough testifies to the continuation of the price movement in the direction of breakdown, with the movement taking place for a long period (for each time frame this value is different).
The false test tells us that the course, after passing a couple of points in one direction or another, unfolds, and then returns.
This is a very dangerous option, which encourages unprofitable trading for many players. They do not receive a confirmation of the breakdown before opening a deal.
Based on the breakdown, many strategies of the forex market were built. All of them are united by a single factor: in case of breakdown, the price, as a rule, will go further, and confidently it is possible to open deals precisely in the direction of breakdown, thereby gaining profit.
Known tactics, level breakdown, involves overcoming the price level.
How and why does the breakdown work?
Assuming that in the market, we get a strong level of resistance, but all attempts by buyers to break through this level are futile until the buyers do not yet emerge on the stock exchange, i.e. A large number of market participants who want to buy.
When a huge number of customers are connected, there is a certain imbalance in the market. Demand exceeds supply, and the price is simply forced to break through that very level of resistance, and will rush on and continue its movement to the next resistance. A similar situation occurs when the price can break through a significant level of support.
How to properly trade on the breakdown?
There are several effective options
1) aggressive opening of positions
Implies entering the market after the closing price (for the level). And then, after the breakdown occurs, we need to open a position, not forgetting the installation of stop-loss orders and take profit. Take profit is set once or twice, or even three, more.
2) entry into the market at the correction
This is a classic option, allowing you to earn more, with potentially low risks. To open a position, a trader needs to apply a re-test: it will help him choose and open a profitable position and get a good profit.
3) correction with confirmation pattern
This option is considered a stable and reliable method for opening a position in case of breakdown. It differs from the previous version in that during the test, the trader expects to see the pattern.
On re-test, the trader can see the bar, more precisely its formation, which will confirm the formation of a breakdown.
Trading at the breakdown level, pay special attention to the last option: it is the most secure and reliable, and despite the rare occurrence of signals for entry, you can profitably trade and receive a stable income.
Historical levels are those that can be determined by carrying out a technical analysis of the market, exploring past time intervals.