Breakouts, Momentum and Volatility

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Video Transcript:

Hello, traders. Welcome to the Advanced Technical Analysis Course and the first module, Technical Analysis 101. In this lesson, you will learn everything about breakouts, momentum and market volatility. This is important because this is how we are going to profit from the markets. As traders, we profit from price movements either to the upside or to the downside. If we see a setup on the bearish side, we will short the market. If we see a setup on the bullish side, we will go long. The bigger the move the bigger the profit and the easier it is to hold your winning trades. The faster the move or the bigger the momentum, the easier it is to hold to your winning trades. In order to get this move, we need volatility and momentum. Now let’s define what volatility is. Volatility is the price fluctuation on any asset over a certain period of time. The thing about volatility is that it doesn’t measure direction. It only measures the fluctuation of the asset. This is why we also need momentum. Momentum measures how quick and strong a price move is. Of course momentum gives direction to this price move and how quickly price accelerates in a single direction. Now what triggers momentum? This is the easy part. Momentum is triggered when a great area of support and resistance are taken out. Why is that? When these areas of support and resistance are taken out, many traders will jump in the profit from the breakout. Not only that, let’s imagine that we are at a support area and the price is testing the support area. There are a lot of traders that position themselves on the long side because we are at a support zone. Of course these traders have stop losses below this area of support. These stop losses act as sale orders that will get triggered if price breaks with this support zone. If price breaks with this support zone, these stop losses or sale orders will trigger and add selling pressure to the breakout. Not only that, when price breaks below the area of support traders who were not positioned long will position themselves short adding another layer of bearish pressure to the breakout. This is where momentum comes from and this creates a fast directional move that, of course, we call momentum. We are looking for momentum. As traders, we are momentum hunters and volatility hunters. We don’t want to trade a low volatility environment because what we are going to end up with is a choppy market. It is very hard to profit from it because the fluctuation is not as intense as you would want it. When a continuation or a reversal pattern like a flag or a triangle breaks, price will move fast in the direction of the breakout. Again, it’s the same thing as an area of support and resistance. A continuation pattern like a flag or a triangle is just a consolidation period before the breakout and a continuation of the move. If you couldn’t catch the move on the initial breakout, you might as well just wait for a continuation pattern to create itself and just trade a breakout. On the fundamental side of things, high impact events will increase volatility in the markets after its announcement. Whether the data is good or bad for the currency that it impacts, traders are going to position themselves accordingly and create short term momentum to profit from. You need to know how it impacts the market so you can position yourself accordingly and profit from this momentum. Of course there are some considerations. In this case, just one. Always wait for a clean breakout to jump in. You don’t want to get caught in a false breakout and what we call a fake out. If you get caught in a fake out, what will happen is that you will get no momentum to the direction of the trade and price will go back to the range it was before the breakout and you will end up with a losing trade. You need a clean break and you need to see some volume or some volatility in the market. How can you see that? Just by looking at you chart and looking at your candles. Of course if the bodies of the candles are large, it means that the buying pressure is building. Remember, guys. If the body of the candles is short, it means that there’s indecision in the market. Support and Momentum Now here’s an example of the U.S. dollar/Japanese yen on a breakout momentum trade. This, guys, is an awesome example on the daily chart. As you can see here, we were trapped inside a 350 pip range. Some of you may think a 350 pip range is good enough for you to be able to go long on its bottom and short on its stop. If you look closely here, there are weeks of zero volatility before just a little dip and zero volatility for a week before a little rally. Yeah, you can trade it on a daily basis but it is not optimal. When we have the breakout above this area of resistance, you can see that momentum builds. This is a clean breakout. This is a huge candle. First of all, we have a big candle below the area of resistance and then we have a huge candle that closes way above the area of resistance. This is a clean breakout. When you see this breakout, you can go long by the U.S. dollar/Japanese yen. You can see here that it rallied 1500 pips to this high. This is a perfect example of a Momo trade or a momentum trade when we get a breakout in a high volatility environment. This is basically what you need to learn and of course these are just the basis for all of the system that we are going to teach you on this course.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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