How to Measure Breakout Strength
The strength of the breakout, traders already know whether it is trading with a breakout strategy and the indicators that can be used to detect it. Likewise, you already know that prices are consolidating in a certain period then there are two possibilities that:
- The price will move in reverse (reversal breakout)
- The price will move to continue the previous movement (Continuation breakout)
There are several ways to determine the strength of the breakout so that the trader will not open a position in the wrong direction.
Moving Average Convergence/Divergence (MACD)
MACD is one of the most common indicators used by forex trading and for good reason. It is simple but reliable and can help traders find momentum, and in this case, lack of momentum! MACD can be displayed in a number of ways but one of the “sexiest” ways is to view it as a histogram. What this histogram does is actually show the difference between the slow and fast MACD lines. When the histogram gets bigger, it means the momentum is getting stronger. When the histogram gets smaller, it means the momentum is getting weaker.
Since MACD shows traders momentum, it makes sense that momentum will increase when the market is trending. However, if the MACD starts to decrease even as the trend continues, traders can conclude that the momentum is declining and the trend could be nearing an end.
Relative Strength Index (RSI)
RSI is a momentum indicator that is very useful as a means of confirming a breakout reversal. Basically, this indicator shows traders the change in the closing price of the highest and lowest prices in a certain period. The RSI can be used like a trader using the MACD indicator to generate a divergence or difference. By finding a divergence, it is likely that we will find a trend reversal. And the principle of divergence or the difference between price movements and indicators.
However, the RSI is a good tool to use to determine whether the market is overbought or oversold. A common indication that the market is overbought is when the RSI is above 70 and it is said that the market is oversold if the RSI is below 30.
Because the trend moves in the direction of time, the RSI will move into the oversold or overbought area and depending on the direction of price movement. If a trend has resulted in an oversold or overbought market for a certain period and then starts to enter the RSI range (between the overbought and oversold limits) then this is a good opportunity because a trend reversal is imminent.