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Breakout trading is a popular strategy that seeks to profit from sudden, powerful price movements that breach established price ranges. Traders watch for assets consolidating within a well-defined range, often signaled by chart patterns like triangles or channels. When the price of the underlying bursts out of this range, either to the upside or the downside, it’s known as a breakout.
Why Breakouts Matter
Breakouts often signify an influx of buying or selling pressure, suggesting a possible shift in market sentiment. A breakout can mark either the beginning of a new trend or the continuation of an existing one. By entering a trade as the price breaks out, traders aim to ride the wave of momentum.
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The Fundamentals of Breakout Trading
Trading the Breakout
To enter a breakout trade, traders often place an order just beyond the support or resistance level. This ensures the position is activated only if there is sufficient momentum to confirm the breakout. Setting stop-loss orders is crucial to mitigate risk in case of false breakouts. Profit targets are typically set using technical analysis techniques, such as projecting price moves based on the size of the consolidation pattern.
Key Points to Keep in Mind:
- Breakouts often occur along with increased volume, confirming the move.
- False breakouts can happen, so risk management is essential.
- Breakouts can signal the start of a new trend or a continuation of the existing one.
Now that we have discussed trade strategies that take advantage of explosive moves after key levels are invalidated, let’s explore two compelling configurations ripe for a potential breakout on EUR/USD and oil prices (WTI futures).
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EUR/USD TECHNICAL ANALYSIS
EUR/USD ticked up Thursday but failed to push past a key resistance at 1.0865, created by the 50% Fibonacci retracement of the 2023 selloff, with prices pulling back off those levels after a bout of risk-aversion. When it was all said and done, the pair stabilized above 1.0835, slightly above the the 50-day and 200-day simple moving averages.
If the market mood improves again, fueling a euro recovery, breakout traders should focus on the 1.0865 hurdle. A decisive breach of this technical ceiling accompanied by strong volume could trigger a rally towards trendline resistance near 1.0920. On further strength, bulls are likely to set their sights on the March high located a tad below the 1.1000 handle.
In terms of risk management, an unsuccessful breakout followed by a sharp reversal below the aforementioned moving averages could signal a fakeout. To avoid being caught in a losing position, traders may consider placing a stop-loss order just below these SMAs, as a move below these indicators could pave the way for an important bearish shift.
EUR/USD TECHNICAL CHART
EUR/USD Chart Created Using TradingView
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CRUDE OIL PRICES TECHNICAL ANALYSIS
WTI crude oil futures have been in a solid uptrend trend since early February, a phase when the commodity has managed to establish consecutive higher highs and higher lows. This upturn has also allowed prices to decisively cleared both the 50-day and 200-day SMAs, offering a bullish technical picture for the medium term.
However, the market’s stretched condition, signaled by the 14-day RSI, suggests a period of consolidation might precede the next leg higher. If consolidation occurs and relieves overbought pressure, a breakout strategy could be viable. Traders awaiting such a scenario should closely monitor technical resistance at $89.00, the 38.2% Fibonacci retracement of the 2022/2023 slump.
An eventual break above $89.00 could reinforce the upside momentum, creating the right conditions for a possible rally towards the 2023 high around the psychological $95.00 mark. Above that barrier, all eyes will be on $96.92, the 50% Fib retracement. In the event of a bearish reversal, confluence support can be spotted at $83.25, followed by $79.50.
WTI CRUDE OIL PRICE CHART
