How to Measure the Strength of a Breakout



Wouldn’t it be nice if there was a way to know to confirm a breakout? If only there was a way to avoid fake outs…


You guessed it…. THERE IS A WAY!


Moving Average Convergence/Divergence (MACD)

By now you should have a good foundation of the MACD indicator. If you don’t, you might want to check out our lesson on MACD.


MACD can be displayed in several ways but one of the “sexiest” ways is to look at it as a histogram. What this histogram does is actually show the difference between the slow and fast MACD line. When the histogram gets bigger, it means momentum is getting stronger. When the histogram gets smaller, it means momentum is getting weaker.

Use MACD with histogram to measure breakout strength.


Remember that trading signal we talked about earlier called divergences and how it occurs when the price and indicators move in the opposite direction? Since MACD shows us momentum it would make sense that momentum would increase as the market makes a trend. However, if MACD begins to decrease even when the trend is continuing, you can deduce that momentum is decreasing and this trend could be close to an end.

MACD with Divergence

You can see from the picture that as price was moving higher, MACD was getting smaller. This meant that even as the price was still trending, momentum was beginning to fade out. From this information, we can conclude that a trend reversal is highly likely.

Relative Strength Index (RSI)

RSI is another momentum indicator that is useful for confirming reversal breakouts. Basically, this indicator tells us the changes between higher and lower closing prices for a given period of time. We won’t go into too much detail about it but if you would like to know more check out our lesson on RSI.


RSI with divergence signals possible breakout.

However, RSI is also good for seeing how long a trend has been overbought or oversold. A common indication of whether a market is overbought is if the RSI is above 70. On the flipside, a common indication of whether a market is oversold is if the RSI is below 30.



RSI in overbought area in forex market.

In the same example as before, the RSI showed that the market was overbought for a billion days (ok not that long). Once RSI moved back below 70, it was good indication that the trend was about to reverse.

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  1. How to Trade Breakouts
  2. How to Measure Volatility
  3. Types of Breakouts
  5. How to Measure the Strength of a Breakout
  6. How to Detect Fakeouts
  7. Fade the Breakout
  8. How to Trade Fakeouts
  9. Summary: Trading Breakouts and Fakeouts