What is Trading Breakouts?
Trading breakouts means entering a buy position when the price moves above a certain level and a sell position when it moves below a certain level.
Basically, it is trading in the direction of price momentum after a certain level has been breached.
Trading breakouts is a perfect way of catching the market trend.
It is the reason trend traders love trading breakouts so much.
Breakouts enable them to catch trends early and ride them like no man’s business.
Did you just begin trading Forex?
Then you must be wondering what all these breakout and catching trend BS are.
In this post, I will show you basic concepts of trading breakouts, which should make you begin trading breakouts like a pro.
It’s a beginner’s guide to trading breakouts.
Trading Typical Breakouts.
What do I mean by a typical breakout?
I mean a simple breakout which occurs after the price has been trading within a range.
Trading such breakouts is simple and the knowledge of it is foundational to trading other breakouts.
Here, the price first falls within a range.
A range is where the price seems to respect and not break an upper level called resistance or a lower one called support.
Once you identify a price range, the next thing to wait for is a breakout either upwards above the resistance or downwards below the support.
You know that the price is about to break a support or resistance level if it has been hitting the level repeatedly within short periods.
It hits the level now, then two seconds later, then 6 seconds later, and so on, repeatedly and closely.
Once the breakout occurs in either direction, you do not trade immediately. You must wait for confirmation of the breakout.
If the price broke above the resistance, you must wait for it to fall to the broken resistance severally and fail to break it downwards.
You can then buy at a bullish candlestick pattern.
On the flip side, if the price broke below the support, allow it to rise to the broken support severally and fail to break it upwards.
You can then sell when you spot a bearish candlestick pattern.
You know that the breakout is going to be huge if the price range was so long.
After a long-range, the price usually breaks out so markedly and the subsequent price movement is huge.
Breakouts Preceded by Buildups.
Far from the typical breakout, here is a different kind.
This kind of breakout is one that occurs after a secondary price range.
First, there is a huge price range with support and resistance which are wide apart, which I call a primary price range.
Second, there is a small constricted price range with support and resistance very close together.
If you notice a primary price range followed by a secondary more constricted one, you know that the breakout is going to be big!
What you have to do is to wait for it to occur, then wait for it to confirm itself.
Confirmation of this breakout is just like the typical breakout.
However, it might be obvious that the breakout is going to be sure once you spot the buildup (secondary price range).
Breakouts from Chart Patterns.
Typically, a breakout should be preceded by a price range.
Such a price range has an upper resistance level where the price seems not to break upwards and a support level where the price seems not to break downwards.
Well, I want to introduce something advanced.
When the price within a range tends not to hit the support level but forms higher lows into the resistance, it forms an ascending triangle chart pattern.
On the contrary, when the price within the range tends not to hit the resistance level but forms lower highs into support, it constructs a descending triangle chart pattern.
Once you just spot the first scenario of an ascending triangle chart pattern, you should prepare for an upward breakout.
Such a breakout is almost sure and so you should prepare to buy.
Once you spot the second scenario of a descending triangle chart pattern, however, you should prepare for a downward breakout.
It is also an almost sure breakout so you should prepare to sell.
But to be sure, subject the breakout to confirmations.
An upward breakout is confirmed when the price falls to the broken level severally and fails to break it downwards.
A downward breakout, however, is confirmed when the price rises to the broken level severally and fails to break it upwards.
Breakouts from Strong Trends.
I know you are used to breakouts which occur after the price has been ranging.
However, I am about to introduce something new here – breakouts that occur on strong trends.
Strong trends are those which show either buying pressure with little or no selling pressure, or selling pressure with little or no buying pressure.
What do I mean by that?
I mean a definite uninterrupted uptrend or a definite uninterrupted downtrend.
A strong uptrend retraces towards and rarely below the 20 period moving average.
On the other hand, a strong downtrend retraces towards and barely above the 20 period moving average.
Strong trends are characterized by occasional retracements that rarely go beyond the 20 period moving average.
Most times, it’s difficult to catch the pullbacks because the market rarely actually retraces.
The best manner to trade this market is breakout trading.
Are you wondering how breakouts can occur on strong trends?
Also Read: – BEGINNER’S GUIDE TO TREND TRADING ON OLYMP TRADE.
Let’s proceed and see.
You trade breakouts by buying when the price on a strong uptrend breaks above a previous swing high.
On the other hand, you can sell when the price on a strong downtrend breaks below a previous swing low.
Trading breakouts is a sure way of acing a strong trend.
You are almost guaranteed that the breakout from a previous significant swing high or low will be successful.
You can also choose to subject the breakout to the typical confirmation, which gives you even more confidence to trade it.
Stop Loss and Take Profit.
Your Stop Loss level should be just below the broken level for buy and just above the broken level for sell trades.
We recommend that you use Trailing Stop Loss to lock in profits because most of these breakouts may result in huge price moves.
A Trailing Stop Loss is therefore the best so that you don’t limit yourself and miss some of the profits.
You can consider exiting a buy trade if the price breaks below a respected moving average or below a previous swing high.
The opposite is true for a sell trade.
Ready to trade breakouts like a pro? You have all that it takes!