Breakout trading, or range trading, as it is otherwise known, is the method of following a trade that has been fluctuating from high to low prices within a certain arbitrary range. The range can be either parallel, converging, or diverging, but usually either one of the first two. These ranges can also be trending either sideways, up or down. Our aim is to know how to trade this pattern.
1. First, what we have to do is draw two straight lines. If you are using a trading software package, this will be effortless. You will probably even find it fun to manipulate those lines, once you become familiar with their options. Edit one line so as to join up the high points of the price range and the other one to similarly join all the low price points. Sooner or later, the price fluctuations will find their way beyond one of these lines and it is this movement that we are interested in.
2. You can also use another couple of indicators, such as moving averages, and volume for instance as an aide to verify, then make, your decision. It is always better to use at least one other indicator anyway, but also I strongly suggest you don't clutter up your chart with too many additional indicators as you will only confuse yourself.
3. There is potential for you to trade as soon as you see the price move beyond one of the breakout lines you have constructed. If there's strong volume too, that's a good indicator. A wave of the buyers or sellers will create a stronger price movement, thus pushing prices out of their current range. Then along with your other indicators, your trade is taking shape and looking sweet for opening a position. Remember, this can work both ways, you will be able to buy or sell.
So, you don't have to be familiar with the characteristics of any particular market, product, business or currency, you can simply scan your charts and chart feed data and look for these breakout patterns.
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