Breakout trading strategy means attempting to enter when price movement is above any resistance or below any support. Traders buy the stocks when the price breaks above a specific level of resistance and sell the stocks when the price breaks below the level of support.
This method is also defined as confirming signals for a mass movement in the market. Scripts have vast movements after they break out. Breakout gives the larger movement, which is backed by the adequate volume after a long consolidation period as compared to breakout, which is after a short period of consolidation.
Technical charts are also the common spots for breakouts which are near compilation to their formation and signal upward price movement. A price breakout normally follows, when the price action makes the final movement to confirm the pattern.
In this chapter today, we’ll study how to implement the breakout trading strategy and some advantages of the breakout trading strategy.
Steps to implement the Breakout Trading Strategy
Identifying the perfect price range and marking the price level on the chart.
To apply this strategy successfully, you should identify the specific price level, which is basically a “V” shape swing high. This is the most essential part while attempting the breakout trading strategy. This can be your ultimate breakout trading level.
Keep patience for a breakout and close above the resistance level.
After identifying the perfect resistance level trade has to keep patience so that the strategy can work potentially. For closing the trade above the resistance level, a trader will need a breakout with a breakout candle. The bulls are controlling the trade as indicated by this sign.
Buy the stock if the VNMA stretches up at the closing price of the breakout candle.
This step is last for implementing the breakout trading strategy. In this step, traders will need the confirmation from VNMA (Volume-Weighted Moving Average) breakout indicator and have to see it stretches up. Traders have to confirm that the moving average has an extreme incline towards the upside.
Put Stop Loss under the Breakout candle and collect profit when you notice breakout below the VNMA.
It is necessary to put stop loss below the breakout candle. Because after breaking the candle which starts breakout, it proved that it is a false breakout. It’s better to take back out from the trade as there is no real buying taking place. When the break is below the VNMA trader can book profit as there is a sign that no buyers are sustaining in the rally.
Avoid implementing the breakout in these situations.
- Avoid breakout trading when the market is away from the resistance and support level. Confirm whether any hurdles are potentially obstructing any advance.
- If there is no compact trading level of consolidation on the chart before a breakout happens, avoid breakout trading strategy in this condition.
- If the break is set against a potential dominating pressure, avoid a breakout trading strategy.
Breakout Example:
As the price breaks the resistance region of the triangle chart pattern, you will notice the massive increase in volume, connected with the earnings release, as shown in the chart. The price gap is created because of a strong breakout. The price is not retracing the original breakout point and continues moving higher. This signals that there is an extreme breakout
Traders used the breakout to get out of the short position and to enter into the long position. The stop loss would be set under the resistance level of the triangle if entering the long position. Because there is a huge price gaping breakout, this stop loss might not be in a perfect location if the price keeps moving upward. The stop loss must drag up to reduce the risk or gain profit.
Advantages of Breakout Trading Strategy.
- While entering the trade using trading breakout momentum is always on the trader’s side.
- With a breakout trading strategy, traders don’t have to worry about missing other major moves which take place in the market.
How to Analyse the Breakout Charts and Pattern?
Once you have understood what breakout trading is, it’s time to understand the concept of reading the breakout indicator chart and pattern. In intraday trading breakout is known as to move above resistance or below support.
These are some points to read the price breakout chart:
- Traders can notice the break of the last candles high or low, from the first resistance and support.
- Traders can measure the resistance as well as short term support from last swings low or high.
- Traders can see the moving average or trend on this chart.
- Traders can also notice the remarkable resistance and support on this chart.
Top Brokers of 2021
HFTrading is a New Zealand based trading platform that renders investment products & assistance at a cheap cost. There are three different account types: silver, gold, and platinum for trading, serving varied investors’ needs.
Further, one can try all the broker services through a free demo service, which gives virtual currency to clients. The possible payment choices are bank transfers, cards, E-Wallets like Neteller, Skrill, and VPay. The customer care officials are open from Monday to Friday, 07:00 to 17:00.
Some of the broker’s top characteristics are outstanding customer service, top tools, an MT4 trading platform, a broad range of goods, varied payment choices, and great leverage.
The leverage is possible up to 1:500, and 350 trading products are including all market types. The company has two prominent regulatory body licenses: ASIC (Australian Securities & Exchange Commission) and New Zealand’s FMA (Financial Market Authority).
T1Markets is a Cyprus based trading broker that offers investment services at less cost. There are three main account types: silver, gold, and platinum, that assist different investors’ requirements.
Further, one can examine all the broker settings through a free demo account, which grants virtual currency to clients. The convenient payment options are bank transfer, cards, E-Wallets like Neteller, Skrill, and VPay. The customer care administrators are open from Monday to Friday, 07:00 to 17:00.
Some of the broker’s full hallmarks are superior customer service, top tools, an MT4 trading platform, an extensive range of products, varied payment choices, and high leverage.
The leverage is possible up to 1:500, and 350 trading goods are including all market types. Distinctly, the organization holds a leading regulating body license from the Cyprus Securities & Exchange Commission (CySEC).
Bottom Line
You have learned in detail what is a breakout trading strategy. It’s undeniable that in every intraday strategy you might be leveraging. If you see that there is no expected momentum while using this strategy, you should access your broker and look to see if it can be corrected. Always open a trading account with brokers who provide all the educational support and reading tools required for executing the strategies appropriately..
