Tradefair Weekly Update / Editor / 18 September 2008 / Leave a comment

Buzzwords of the week tip #11

What is a break out?

You might have heard traders referring to break outs but what does it all mean? A break out occurs when price rises above a level which has previously stopped moves upwards, or falls below a level which has previously stopped moves downwards. Once getting through the level price will often move strongly away from it. But sometimes a failed break out occurs. Price break outs beyond a level, then turns round and retreats back within the level.

Technical tip of the week

On the Tradefair Spreads platform you can draw horizontal lines to help identify important price levels stopping moves up or down. You'll find this feature particularly useful if you're trading break outs.

Recent false break out in Dollar Yen

A critical level in Dollar Yen since December 2007 has been 108. A horizontal line has been drawn on the weekly chart of this currency pair, extracted from the Tradefair Spreads platform.

First of all, 108 stopped the decline in December 2007. Then a break out below 108 in January 2008 led eventually to a sharp decline to 96 in March. A rise in price from this low was held at 108 for most of June and July.

In August price broke out above 108, but could only get up to 110 and has now slipped back below 108 again. The August break out was a failed break out. After this failed break out we have recently started to see the beginnings of a new downtrend, away from 108.

Trading the March break out

Some traders decided to go short when price broke out below 108 in March. Bets in Dollar Yen are priced in pounds per 0.01 Yen. Going short £1 per 0.01 Yen at 107.50 with a stop at 109.00 risked a maximum potential loss on the trade of £150. Trailing a stop above the high of the previous week, the exit from this trade would have been around 100.50, yielding a profit of £700, and a good reward to risk ratio of over 4.6.

Putting it to the test

We can't give you advice about specific trading, but why not log in to your Tradefair Spreads account now and check whether you can see similar patterns in other currency pairs such as the pound against the dollar or the dollar against the euro? Use the horizontal line tool to help identify price levels stopping moves up or down and see what you can see.

Of course, if you have any questions, you can contact us by clicking here. In the meantime...

Happy trading!

The Tradefair Spreads Team