What is a breakout trading strategy? Today in this article, we are going to discuss breakout trading strategies and how they work. We discuss the advantages and disadvantages of breakout trading so that you can quickly sum up whether it is helpful for you or not. Here we also discuss some effective tips for breakout trading strategies.
Breakout trading principal is not dedicated to a particular market. You can apply this technique in any market, such as commodities, forex, stocks, and bonds. Even it is performing efficiently in the cryptocurrency market. This article covers complete details about breakout trading strategies.
What is Breakout Trading?
Breakout trading is a technique to enter the market while the price shifts outside the defined costs range (resistance and support). Although, an efficient breakout always comes with raised volume.
In breakout trading, an effective breakout always comes with a bold, colossal candle. When the candle closes at the perfect support resistance level. The resultant of this in breakout trading is more powerful. The important rule of breakout trading is that the larger the breakout candle, the better the results.
There are two types of breakout trading strategies that you need to remember for understanding breakout techniques.
- Swing high and Swing low breakouts
- Support and Resistance breakouts
Breakout trading of a swing high and Swing low
A swing high and swing low trading strategy has similar features like support and resistance breakout strategies, including some filters. Are you curious what filter is this? We need to break out trade arrangements that help us to generate better outcomes. This happens because all swing highs and swing lows are not created similarly.
This is because we only apply breakout trading “ the swing high and the swing low” along with “V” shape formations. A shape “V” formation swing high should be explained through a challenging rally, fastly followed via a harsh selloff. Alternatively, the same applies to a shaped “V” swing low.
Breakout trading strategy is sufficient for a particular trade. You may not need to apply any other strategy with breakout trading strategies. But it is not entirely true. The huge drawback about breakout trading is that there are multiple false breakouts.
Breakout trading of a support and resistance breakout.
Support and resistance breakout trading strategy will help you perform trade perfectly at the section where the price will reverse. Trading support and resistance lines are specified for each investor to apply in their system. It is the prime concept in price acting trading. But it all depends upon the ability to determine whether the support and resistance will hold or fail. A good thing about breakout trading is that it targets money-making while support and resistance fail.
- While resistance levels do not work in this condition, traders target to purchase as the market breaks out on it.
- In the second condition, while a support level does not work, traders target to sell as the market breaks out under it.
Important factors of breakout trading strategies
- Search market present between support and resistance.
- Wait till the market breaks far away from the support and the resistance.
- Enter the market as volatility rolls behind the market.
Must note that breakout trading only uses general support and resistance. Therefore you can apply these indicators above any time frame. Furthermore, breakout trading is a part of momentum trading. This means you should:
- Waiting for momentum to enter it.
- Never predict the market and react too.
- Buying high and selling low (every trader does not prefer this)
- Generating good returns by a rise in volatility.
Advantages and Disadvantages of Breakout trading strategies
- The profit potential is instant – profits are generated fastly as breakout reaches nearer to the hostile price movements.
- Breakout trading works on the strength of momentum.
- It consists of the potential to determine the latest trends.
- Offer transparent trade management rules – entry and exits are pre-decided.
- A false breakout is the most significant disadvantage of breakout trading. Traders do not prefer to buy at the high of the day or sell at the low because of the false breakout.
Key factors to identify real breakout and avoid fakeouts.
Breakout trading is a general concept of price action trading strategy to perform while price shifts outside the specified range. Breakout trading is a public technical trading technique. Check here three concepts that play an essential role to determine real breakout and avoid fakeouts.
- How to create a Trend line.
- How to Differentiate between a real breakout and a false breakout.
- Trade execution Process Flow.
How to create a trend line?
A trend line is a straight line created on a chat that connects two or more price peaks that help us determine trend, resistance, and support points and allow us to spot multiple efficient trade opportunities.
Important points that help us to draw simple trend lines are:
- Ignore creating trend lines on charts that consist of any gaps and wicks. Try to avoid charts in which price action is not smooth.
- Apprise only 2 to 3 peaks to create a trend line.
- A trend line should be an efficient trend line while it joins various peaks.
- Do not create high slop trend lines due to it being a signal of an unhealthy trend.
- The price can often respect the trend line.
How to determine a real breakout from a false breakout by applying trend line breakout?
These four things mentioned below are necessary to determine a real breakout from fakeouts.
- A Huge breakout candle
- Fast time (the price will not shift in small candles after the breakout.
- Absence of selling.
- Good volume.
If your chart shows all these characteristics at the time of breakout, that means there is a possibility of a good upside shift. If traders consider capitalising on huge moves in fast timings, they shortlist the stocks that display consolidation before the breakout. Various traders may also consider breakout chart patterns for creating their trades Few great breakout patterns are:
- Cup and Handle
- Ascending Triangle
- Inverse Head and shoulder
- Symmetrical Triangle
- Flag Breakout
Trade Execution Process Flow to Trade multiple breakout patterns
A smart trader always consists of a trading strategy before performing the trade. As an investor, before completing a trade, you need to understand some aspects of breakout trading. Here we mentioned five main aspects of breakout trading.
- According to your system must determine your entry point.
- What if your analysis moves towards the wrong path and the trade setup fails? In this condition, never forget to apply stop-loss.
- Set your anticipated exit based on your trade strategy for creating profits.
- How much amount you can keep at risk in the particular trade.
- How much amount do you stake on this trade out of your complete portfolio?
Stop-loss are some ticks that are present at the lower end of the breakout candle. Select only those trades that are showing a minimum of 1:2 Risk-Reward. However, you need to avoid the setup and search for better trade formations. Some risks free brokers who offer tradable instruments for trading are ETFinance and Tradedwell.
Some Best Breakout Trading Strategies
Search for a clear price range or a “V” shape swing high.
The initial step of the breakout trading strategy is to associate the price level. It should be at a breakout trading level. It is an essential step of breakout trading for efficient results. This is because we only need to remember clear and significant levels.
Wait for a break and a close above the resistance level.
After finding the perfect resistance level, you need to keep patience and wait for the right time. Then, we have to break out and break out the candle to close above the resistance level. This shows that the bulls are appropriately managed. But our responsibility does not finish here, and we need to confirm this by the VWMA indicator. This leads us to the green signal to perform breakout trading.
Purchase at the breakout candle closing price only when the VWMA is rising.
Never forget to confirm from the VWMA. We have to watch the VWMA rising. And the MA (moving average) requires a deeper inclination upwards. Previous to the breakout, the VWMA only shifts higher after the breakout takes place. We see that the VWMA consistently rising and showed a tough presence of volume after the breakout. After bringing it, we need to determine which place is best for keeping protective stop loss. Must calculate from where we can generate remarkable profits. This will help us to take the next step of breakout trading.
Keep your Stop loss under the breakout candle and gain profit while you watch a break under the VWMA.
It is necessary to keep our protective stop loss just under the breakout candle. This happens when we break below the candle that minimises the breakout; It tells us that it is a false breakout. No genuine purchase will happen, so it is better to leave the trade. Take profit strategy is inbuilt due to a break present; the VWMA tells us there are no more purchasers to support the current rally. We need to hold the profit when the market is prepared to roll over.
Open Range Intraday Breakout Trading System (ORB technique)
ORB strategy is the most popular trading strategy among intraday traders. Toby Crable developed it. It is created based on the concept “ Beginners open the market and professionals close the market”.
Beginning hours after the opening of the market are very crucial. And create the base for other activities which take place throughout the day. When the market opens, the opening range is referred to as a range among high and low of a particular period. Some traders considered the first 30 minutes as their opening range, and some considered starting 60 minutes as their opening range.
If the price breaks upwards, they go with a long trade on the hike of 1-hour opening range and set the stop loss a little bit below the breakout candle. However, few investors opt to trail their stop loss with the costs by a moving average, ATR, PSAR, and Bollinger Band indicators. Alternatively, some investors considered keeping the trade with minimum stop-loss upto the market completion to ignore closing the trades because of whipsaws.
Breakout Trading vs Pullback Trading
Pullback trading is an enlarged version of breakout trading. In pullback trading, investors do not react until the costs gain support at previous breakout areas to create an entry point. Alternatively, in breakout trading, traders entered the market instantly after the breakout. Tough stocks may not offer a pullback after a breakout. This is a significant risk with the pullback trading.
Does breakout trading really work?
Breakout trading works efficiently in any market situation, and if it performs well, breakout trading can generate remarkable returns. The most effective breakouts are channel breakout, a result of trading range breakouts, triangle breakout, support and resistance breakout, flag breakout, etc.
Which is more effective: breakout trading and swing trading?
Breakout trading is more effective than swing trading because breakout can hold substantial price swings and significant price shifts. Swing breakout is generally applied in harmony along with the long term trend.
Is Breakout Trading really profitable?
Breakout trading is the best source of generating quick profits. However, to become a successful breakout trader, you have to study the anatomy of a breakout and must learn how to determine false breakout for avoiding significant losses.
Breakout trading strategies provide you two benefits such as instant gratification, and you learn quickly whether your breakout trading idea will work or not. Through this article, you can learn various breakout trading strategies for generating high profits. Here we also compare breakout trading with other trading strategies for showing you the difference between them. This article covers complete information about breakout trading. Beginners can quickly grab complete details about breakout trading strategies from this article. Some top brokers who offer to trade are Tradedwell and ETFinance.