Today's article is about trading breakouts and it is surely good for you to get this knowledge. There are different types of traders. Some prefer scalping, others position trading or intraday trading. Whatever style you choose, there are some common techniques you can use. And trading breakouts is one of them.
Contents
What is the breakout?
The support and resistance levels are frequently used in technical analysis. The price interacts with them. It tests them by coming close and then bouncing back. But eventually, the price will move beyond them and this is what breakout is.
How do you spot a breakout in trading?
The breakout can occur during the uptrend and then it is called bullish or during the downtrend and then it is known as bearish.
You may notice that often before the breakout the price consolidates. It is gaining momentum and the longer it takes, the stronger breakout follows.
The art of trading breakouts
There are two approaches to registering the breakout. One is saying that it is enough that the price goes higher than the previous maximum or lower than the former minimum. So the last top or bottom of the candle is considered to be resistance or support.
The second approach suggests waiting for the level being tested. This is a more careful plan but it minimises the risk of getting into a false breakout trap.
False breakouts
False breakout happens when the price seemed to break the key level but suddenly reverses. Such a phenomenon is also known as flirting with support/resistance.
Naturally, you would like to avoid falling for a false breakout. There are some ways to do it. You can, for example, wait a bit before opening or closing trading positions. Do not enter just with one candle over the level but check where the next candle develops.
You can also check the market situation on different timeframes. On lower timeframes, you will catch short-term movements and candlestick patterns that can suggest a reversal of the trend. On higher timeframes, you will see a long-term trend and price movement relevant to key levels.
When trading breakouts, false signals are inevitable. So if you are trading forex or CFDs remember to maintain a good profit/risk ratio. This good ratio, e.g. 2:1 and above, will make you earn even with a 50% success rate.
What happens after the breakout?
You can expect that after the breakout the price will retest the key level. This happens quite often. The price breaks the level then moves back to it and afterwards continues the direction in which the breakout has occurred.
Traders often enter the transaction at the moment of correction. Let's see it in the example.
You can see that the support level was broken with a single long bearish candle. After that, we had a correction and what was a support level now is a resistance level. Price is simply retesting this key level.
What is the best breakout strategy?
Trading breakouts is an art of sorts. However, it is worth putting specific rules around the strategy. The use of additional tools is also welcome here. I personally like to wait for a pullback after breaking through an important level. When the price turns back I wait for a retest of this level in an inverted role. This is where knowledge of candlestick formations comes in handy. They can be the final trigger here to open a position.
Is breakout trading profitable?
You learned today the anatomy of trading breakouts. After some time spent observing the chart, you will see the breakouts happen frequently. You should also notice they are preceded by price consolidation (the longer consolidation the more aggressive breakout) and followed by retesting of the level.
There is always a risk of a false breakout. That is why you should be cautious when opening trades. Wait for confirmation or check the situation on different timeframes.
Search for breakouts in the IQ Option demo account. You can train there without the risk of losing your money. After some time, you should shift to the real account to gain some profits.
Do you have experience trading breakouts? What assets are best suited for this in your opinion? Be sure to share your thoughts in the comment section below.
Wish you good trading decisions!