Trade Breakout with Momentum

One of the reason that many traders fail to trade the breakoutsprofitably is simply because they don’t take the time to measure thestrength of the price movements. Luckily, this isn’t really a difficult thingto do. In fact you only need an understanding of two indicators toproperly gauge the strength of a breakout.To gauge the right times to trade a breakout we’ll use the MACD(Moving Average Convergence Divergence) indication, and we’ll also use the RSI (Relative Strength Index) indicator.
To learn how to use MACD to properly trade breakouts let’s talk about the indicator itself. In it’s normal use (12, 26, 9) the MACD indicator actually contains three different types of signals. It has:
1. A MACD line which is the difference between the 12 period and 26 period EMA’s
2. A 9 period EMA used as a signal line
3. A histogram which represents the difference between the MACD line and the signal line.
If you look closely at the signals you can get from the MACD you’ll begin to notice a few things. First when the MACD line rises above the signal line the histogram also rises above the zero line. As the price movement accelerates the histogram grows and the space between the MACD line and the signal line also grows.
As the momentum of the price slows the histogram falls closer to thezero line, the two lines also grow closer together and eventually cross over (assuming the price has changed direction). You’ll also notice thatthe sharper that crossover is, the faster the price was moving when the MACD and signal lines crossed. The same scenario is true for downward price movement but the signals are opposite (the histogram is below zero and the MACD line is below the signal line).
In other words the MACD is very good at detecting price moment, and we can use it’s signals to help us gauge when a reversal breakout is about to occur..
The divergence of the MACD can be a good indicator that a reversal is about to occur. If you see the price making higher highs and at the same time the MACD is making lower lows this tells us that a reversal is likely to occur. When you see a potential reversal breakout scenario on the charts you should always check what the MACD is doing. If the histogram is doing the opposite of what the price is, it’s a good confirmation that a real reversal breakout is about to occur. RSI Another indicator that can be useful to gauge momentum and confirm when a breakout is about to occur is the RSI (Relative Strength Index). This indicator is often used to indicate overbought and oversold condition, but for our purposes we don’t want to use it that way. Much like the MACD, before a breakout occurs you’ll often see a divergence between the price on the charts and the line on the RSI.
Looking at the chart above the price is on it’s way up, and the peaks of the RSI create line down. Shortly after that occurred a breakout did occur, which reversed a long standing up trend. Checking the RSI, in this fashion, can be useful to confirm your signalswhen a breakout opportunity is showing on the charts. It will help you to avoid the false breakout signals.
In the last example Fractal breakout filtered with MACD. Indicators MT4 Fractals adjustable price breakout, MACD 2 line. Time Frame 5 min or higher.
Fractal breakout filtered with MACD
Link below for download template MT4 Fractal breakout filtered with MACD

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