A breakout refers to an increase or decrease in the value of currency pair that takes it out of its previous trading range. The trading range is made up of support and resistance. Both these levels are usually formed by previous lows (support) and highs (resistance). When a currency pair has a breakout, it usually means a new trend is being formed.
Because support and resistance represent psychologically important levels to many traders, any move approaching these levels gets a lot of attention. For this reason, false breakouts – temporary breaches of the levels – occur from time to time before the price action falls back into the trading range. Every forex trader has his own way of reading a “true” breakout before taking up a position. As currency traders buy in to or sell short on a breakout, they lend strength to the movement and cause new levels to be breached.
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