======= Momentum indicators indicating overbought and oversold prices can also indicate a reversal. If Williams %R, RSI, Stochastics, etc... indicate oversold on a downward trend after a retracement to the top of the down trend channel, a break can occur to the upside. Of course if the indicator indicates oversold at the bottom of a downward trend channel, it may only indicate a retracement (or consolidation) prior to the downward trend continuing. Retracement or Reversal - A check List may help you here.
As discussed in Trading the Range & Trend Channels & in other chart pattern lessons we saw that price break-out's can happen frequently and at it's heart is understanding support and resistance. Break-Out Trading is 'generally' a Day trading activity, but can be utilised with longer timeframe trading too, where the goal is to enter the market just after the break and take advantage of the volatility, until that volatility dies down. This break-out generally occurs after a period of consolidation with reducing volume. In the stock markets we can use volume to confirm the break-out, but The Forex market doesn't have a volume indicator. We need to rely on volatility (ATR) when trading Forex, coupled with good money management. We'll discuss all these options a more below to identify the break-out
Tools to Identify The Break-Out
Trading The Break-Out
We've looked at the tools to I.D. The break-out, but how do we trade it. One method of trading the break-out is by utilising The ATR, which proves to be a very useful indicator. More on this can be seen in out lesson "ATR - Average True Range - A Volattility Indicator" At a fundamental level at resistance, an increase in ATR show's strong buying pressure and can reinforce a break. A bearish support break with an increase in ATR would show strong selling pressure and reinforce the support break.
The directional/non directional bias straddle trade is another Break-out trading strategy that may be worth a look.
To Sum UP
The main learning to get out of this lesson is understanding how to identify the break-out. Use the tools to identify the break-out to increase the probability of catching this move and incorporate them into your strategy. Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.