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On October 15, 2024, a significant breakout was detected in the GBP/USD currency pair. This article dives deep into the technical aspects of this event using a real-time live account perspective. The insights shared here offer a thorough guide on detecting and analyzing such breakouts, including factors to observe, the strength of price moves, divergence, and critical monitoring levels.
Please watch the video for deep analysis:
How to Detect and Trade Breakouts with Confidence?
- Identify Key Resistance and Support Levels
- Focus on trend lines formed over time, such as the resistance seen in GBP/USD around October 4-8, 2024.
- Watch for repeated touches and rejections at critical levels, indicating market hesitation before a breakout.
- Monitor Price Action During Market Opens
- Pay attention to solid price movements during major sessions like the London Open.
- A sudden bullish or bearish move shortly after the session starts can signal the beginning of a breakout.
- Evaluate the Strength of the Breakout
- Analyze the angle and speed of the price movement. A vertical price move with bullish solid or bearish candles on a 15-minute chart can indicate a potential breakout.
- Look for a clear breach of resistance or support levels, followed by a pullback to test the breakout zone before continuing the trend.
- Use Divergence Indicators on Higher Timeframes
- Apply indicators like the Relative Strength Index (RSI) on larger timeframes (e.g., 4-hour chart) to spot bullish or bearish divergence.
- The divergence between price action and the RSI, such as a bullish divergence, can signal an upcoming breakout.
- Watch for Institutional Defense of Key Levels
- Institutional traders often defend psychological price levels, like 1.30 on GBP/USD, which can lead to significant market reactions when those levels are challenged.
- Repeated rejections at a critical price indicate a breakout is imminent once the level is finally breached.
- Confirm the Breakout with Other Currency Pairs and Dollar Index
- Cross-reference the breakout with currency pairs like EUR/USD or the U.S. Dollar Index.
- If both show simultaneous breakouts or critical movements, it adds confidence that the breakout is valid.
- Set Realistic Targets Based on Moving Averages
- Use moving averages, such as the 50-period moving average, to identify resistance or support levels that the price might react to after a breakout.
- In GBP/USD, the 50-moving average coincided with 1.31, marking a key reaction point post-breakout.
- Watch for Market Reactions at Key Price Levels
- Identify and track potential reaction points where the price might stall or reverse. For example, GBP/USD projected levels of 1.31 and 1.317 could serve as resistance after a breakout.
1. Market Context: Bearish Trend Leading to Breakout
Leading up to the breakout, the GBP/USD had been strongly bearish for several weeks. The critical resistance level that played a central role in the breakout occurred over the past 10 days. This resistance was visible from October 4 and became especially prominent on October 8. A clear trendline had formed, which the price tested repeatedly, and each test led to a rejection.
However, on October 14, during the London session, the price exhibited signs of a strong bullish move. This occurred just after the London market opened, marking the beginning of the breakout scenario.
2. First Detection: Strength of the Price Push
The first step in detecting the breakout was observing the strength of the price movement. A breakout is often indicated by the sharpness and speed of price moves, which can be easily seen on the 15-minute chart. The price showed a nearly vertical rise during the London session, suggesting a bullish solid push.
Key to this analysis was the angle of the price movement. A steep or vertical rise indicated that the breakout was imminent but has not yet been confirmed. When examining breakout detection, monitoring how sharp the bullish or bearish candles are is crucial. Several bullish candles following the resistance break suggested that this was more than a false breakout.
3. Confirmation Through Resistance Break
The next step was confirming the breakout through the breaking of the resistance. On October 14, the price finally pushed through after multiple attempts to breach the resistance around the 1.30 level. This was followed by a quick retest of the resistance level, a common occurrence in breakout scenarios. After the retest, the price resumed upward trajectory, confirming the breakout.
Watching for a retest of the broken resistance was critical at this stage. Breakouts often involve brief pullbacks, during which the price tests the previous resistance (now support) before continuing its upward movement.
4. Divergence on Higher Timeframes
A vital component of this breakout detection was analyzing divergence on higher timeframes, particularly the 4-hour chart. A bullish divergence was identified using the Relative Strength Index (RSI). This means that while the price was making lower lows, the RSI was making higher lows, indicating underlying strength and a potential reversal in trend.
From October 3 onwards, the bullish divergence on the 4-hour chart became increasingly apparent. As the price continued to drop, the RSI moved upwards, creating a disconnect that typically signals a reversal. When the price finally broke through the resistance, this divergence was a leading indicator, suggesting that the breakout would be sustained.
5. Rejection at Key Levels: Institutional Activity
An important observation during the breakout was the price’s behavior around the psychological level of 1.30. Institutional traders often defend key levels like this, which is evident over the past five days as the GBP/USD tested 1.30 multiple times before the breakout.
The price’s strong rejection from this level indicated significant institutional interest. Once the price pushed through 1.30, it became clear that institutional traders were no longer defending this level, allowing for a strong, bullish move.
6. Correlation with Other Markets
To confirm the breakout, the U.S. Dollar Index (DXY) and the EUR/USD pair were essential to observe. On the same day, E was essential/USD broke its critical level of 1.09, showing bullish behavior similar to GBP/USD.
This cross-market analysis provided additional confidence that the GBP/USD breakout was genuine. The U.S. Dollar Index’s weakness contributed to the upward movement in the EUR/USD and GBP/USD pairs, reinforcing the breakout signal.
7. Key Price Targets and Moving Averages
Once the breakout was confirmed, the next step was identifying potential price targets. Using the 50-period moving average on the 4-hour chart, the immediate target for GBP/USD was identified at 1.31. This level corresponded with the moving average and the next significant resistance point.
Further targets were set at 1.315 and 1.317, with the latter being the high set earlier in the month during the NFP report. The breakout’s momentum suggested that these levels could be tested in the coming days.
8. Managing Breakout Trades
After entering a trade based on the breakout, managing the trade became the next priority. Key levels, particularly around the moving averages, were monitored for potential reversals. As the price approached 1.31, some retracement was expected, but the overall bullish sentiment indicated that the breakout would likely lead to new highs in the near term.
By closely monitoring price action, particularly around 1.31 and 1.317, traders could effectively manage their positions and capitalize on the breakout.
9. Conclusion: Lessons from the October 15 Breakout
This breakout in GBP/USD provided a textbook example of how to effectively detect trade breakouts. Key elements of this breakout included:
- The strength and verticality of the price movement.
- Confirmation through a resistance break and retest.
- Divergence on higher timeframes, particularly the 4-hour chart.
- Institutional activity around psychological levels.
- Cross-market analysis with EUR/USD and the U.S. Dollar Index.
- Setting and managing price targets using moving averages and key resistance points.
Following these principles, traders can detect and profit from breakouts in the forex market, as demonstrated in GBP/USD on October 15, 2024.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
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