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.
A
LOOK AT MACD
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).
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.
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.
Link
below for download template MT4 Fractal breakout filtered with
MACD
https://drive.google.com/file/d/0Bwjv2Pbf48itNEtDb3NNdXpGRlU/view?usp=sharing
https://drive.google.com/file/d/0Bwjv2Pbf48itNEtDb3NNdXpGRlU/view?usp=sharing
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