Breakouts or momentum which indicator is best? The former is preferred by some traders to signal their trend entries while the latter is preferred by other traders to just get an indication of strong directional momentum. Who chose the right indicator and which works better?
Momentum Indicators
There are a various momentum indicators and all of them calculate price momentum, allowing the indicator user to see at a glance whether a particular currency pair is showing strong momentum long or short or is simply chopping and ranging sideways showing no momentum at all.
Technical analysts have formed a wide range of such indicators that are broadly available for free on every trading platform. The renowned ones are moving average crosses, the Relative Strength Index, MACD, Stochastics and Bollinger Bands. What they do is basically look back over a determined period of time and calculated whether the price movements have been more bullish or bearish. The internal formulas of each indicator are conceptually similar.
Momentum traders tend to simply check and see whether the price shown by momentum indicators is more bullish or bearish on both shorter and larger time frames. When both types of time frames are showing momentums, a trader in the direction of running momentum is taken.
Another approach that can be adopted, which may be either in substitute of the use of indicators or complementary, is to draw key support and resistance levels and watch to see if they hold to break.
Forex Breakouts
Another way to achieve the same kind of trade entry with strong momentum is the breakout. This is a popular trend trading approach. In fact, famous Turtle Traders used an entry technique based upon breakouts of 20 and 55 days high or low prices.
This kind of approach is very attractive as it is extremely simple and take the least time. it is a "set and forget" mechanical trade entry. For instance, at the end of each day, you can simply enter an order with your broker to go long or short at A and B prices, which are known to you as the highs and lows of the given look-back period, and then you do not have to worry about it for another 24 hours or so.
It is largely believed that these kind of crude mechanical strategies based on breakouts are too brainless and do not produce good results. In modern markets, there are many more "fake outs" than "successful breakouts", particularly in Forex prices which tend to move in tighter ranges than stocks and commodities.
Traditionally, a stop loss of three multiples of the Average True Range is used in trend trading, which also often uses breakouts for entries. Of course, using a stop this broad will tend to produce more winners, but the size of the winners will be smaller than if tighter stops had been used.
Traders tend to worry too much about entries, whereas the real challenge is to hold on for large profits instead of being shaken into premature exits. You can learn many more similar strategies and indicators by attending Forex seminars online on several platforms.